The Gilmo Report

January 6, 2021

January 6, 2021 7:09 pm ET

The idea of a Blue Wave as Democrats won Senate seats in Georgia yesterday gave the market a case of the blues this morning. Techs took the brunt of the selling at the open as the NASDAQ Composite Index and the other averages opened down this morning. But the realization that a Blue Wave also likely means trillions more in fresh QE finally overcame the market and stocks began to rally off the morning lows.

Things were moving along nicely until it was reported that protestors had broken into and were occupying the U.S. Capitol building in Washington, D.C. This sent everything into reverse. By the close, the NYSE-based indexes had given up a good chunk of their earlier gains while the NASDAQ ended in negative territory, led by a 1.4% decline in the NASDAQ 100 Index.

 

 

On its face, the action was wild and woolly, with the NASDAQ showing some serious distribution while the other indexes stalled on heavy volume but still closed up for the day. This included the small-cap Russell 2000 Index, which broke out to all-time highs on a 3.77% move higher, as the daily chart of its proxy, the iShares Trust Russell 2000 ETF (IWM), shown below. That move was largely due to a mass of small-cap financial and materials/commodity-related names shooting higher.

 

 

“Stuff stocks” that I discussed over the weekend and in recent video reports have assumed a leadership role to start off the New Year, which serves as initial confirmation of my commodity-inflation theory as discussed over the weekend.  For those unfamiliar with the term stuff stocks recall my discussion over the weekend concerning the inflationary commodity-stock bull market of 2006-2008.

During that period, I coined the term stuff stocks to describe the types of stocks that created that big commodity-related bull run from 2006 to 2008. The term worked well because they were stocks that made stuff. Whether that stuff was agricultural products, chemicals, fertilizer, oil, industrial metals, precious metals, and other things that qualify as stuff, including the stuff that transports stuff (e.g., big ships) it was a very ripe leadership area where huge price moves were seen during that unusual market phase.

And so today we see some early indications of a possible rotation into stuff stocks as the potential for further dollar debasement, more debt, and higher inflation under the Blue Wave Regime increases meaningfully. Industrials metals have been on the move over the first three days of the New Year, including the three that I highlighted in the weekend report, Alcoa (AA), Freeport McMoRan (FCX), and U.S. Steel (X).

All three blasted higher today after revving up earlier in the week. All three are also extended, and all three are expected to report earnings later this month. So, for now, we can watch for the first pullbacks to show up as these streak higher.

 

 

In the other metals area that I’m interested in currently, precious metals, we also see some extended moves off the lows of late November. Precious metals mining stocks are certainly stuff stocks, and my favored group of silver miners, including First Majestic Silver (AG), Coeur Mining (CDE), Gatos Silver (GATO), and Pan-American Silver (PAAS) has been running nicely off the late November lows.

All four are extended but can be watched for pullbacks to their 10-day moving averages. At this stage, those would be the only opportunities to watch for in these names as they have treated us very well over the past few weeks, particularly our friend GATO.

 

 

With silver miners pushing well off their lows, we might expect gold miners to play catch up. Gold has certainly lagged the move in silver over the past month or so, accounting for the lag in primary gold miners, but they are now starting to turn and may be looking to play catch-up.

In the group chart below, we can see that Agnico Eagle Mines (AEM), Alamos Gold (AGI), Eldorado Gold (EGO), Barrick Gold (GOLD), Kirkland Lake Gold (KL), and Newmont (NEM) have all pushed through their 50-day moving averages where they present potential long entry points along the line. We’ve seen that so far this week in AEM and KL while GOLD is working its way along the 50-day line and NEM and EGO are well-extended from any nearby support.

 

 

Precious metals also remain in uptrends, despite starting off the day today on the downside. Given how extended they had become over the past month, however, sharp pullbacks are to be expected along the way. In this case, this morning’s pullback in the SPDR Gold Shares (GLD) brought it right down into the 10-day line where it was buyable, and by the end of the day we saw some strong support off the line.

 

 

The iShares Silver Trust (SLV) pulled a virtually identical maneuver today as it also bounced off the intraday lows when it came within ½ a percent of the 10-day line before rallying sharply. The SLV closed the day at its intraday highs on heavy volume in a reasonable show of support at the 10-day line. Both gold and silver remain buyable in opportunistic fashion on further pullbacks to their 10-day moving averages.

 

 

Agricultural names discussed over the weekend have also been on fire as of late, as the group chart of Bunge (BG), Corteva (CTVA), Mosaic (MOS), which Nutrien (NTR) shows below. These were all in buyable positions earlier in the week, especially BG and CTVA, but they are now extended. As with the metals, we are now watching for the first pullbacks to find out whether this move has legs or whether the great Stuff Stock Bull Market of 2021 will turn out to be a big dud.

 

 

Keeping in the spirit, the company that makes machinery that pushes, digs, and carries stuff that mostly comes from the ground, Caterpillar (CAT), has also seen fit to launch higher. It was quite buyable Monday morning at the 10-day line, as I indicated it would be in my weekend report. Today, it shot higher on a very strong move. It is now extended, but was there for the taking earlier this week.

 

 

These stuff stock names that I’ve discussed in recent reports were just a handful of scores of these commodity and materials-related stocks that have been running this week. The list of 26 such names that I posted on my blog page Sunday evening saw nothing but green yesterday, and some of these names followed through with strong moves again today.

The leader on that list today was Dycom Industries (DY), which posted a big-volume breakout on a 16.64% move higher. Technically, this is just out of buying range for you base breakout buyers but can be watched for any pullbacks closer to the 79.41 breakout point.

 

 

And, since lithium is another commodity that is pulled from the ground, I also re-highlighted the group over the weekend as another stuff stock area of the market that we had to take seriously. Among my favorite lithium names, I consider Albemarle (ALB) to be the big-stock leader, as well as the one least likely to unload a secondary stock offering for the purpose of raising cash for nascent lithium projects.

The other three, Lithium Americas (LAC), Livent (LTHM) and Piedmont Lithium (PLL) may be more likely to do so, but so far it has been more a case of the boy who cried wolf. LAC is wildly extended after a big run this week off the 10-day line, and LTHM was buyable earlier in the week along its 10-day line.

PLL is the odd man out here as it quickly reversed today after posting a strong-volume pocket pivot off the 10-day line yesterday. It closed just above the 10-day line, which brings it into a potentially lower-risk entry position using the 10-day line as a tight selling guide. Bottom line for these names: Lithium is stuff, and with the added electric-vehicle theme behind them as well, lithium names should participate in any continued stuff stock rally.

 

 

Even lowly penny-stock Chinese lithium producer CBAK Energy Technology (CBAT) has suddenly found its wings. The stock blasted off its 50-day line today on a big-volume pocket pivot move that stalled near the prior December high.

 

 

Solars also caught a ride on the Blue Wave today, but big gap-up moves in Canadian Solar (CSIQ), DAQO New Energy, Enphase (ENPH), and SolarEdge (SEDG) all stalled today. Whether these moves have legs remains to be seen, but since they are all extended it’s a matter of seeing how these moves hold up, and whether some coherent entries can be found in the ensuing action over the next few days.

 

 

In my second solar group chart, including Array Technologies (ARRY), First Solar (FSLR), Sunrun (RUN), and SunPower (SPWR), gap-up moves today have put all but one of these out of actionable range. FSLR, however, is interesting as it broke hard yesterday on huge selling volume on a failure back below the $100 Century Mark.

If one was watching this yesterday, it actually triggered as a short-sale early in the day and continued lower from there before closing at 92.16. But today’s Blue Wave washed the stock back onto the shore of the $100 Century Mark, where it stalled to close just below the $100 price level on heavy volume. So, initially, this plays as a short here using 100 as your covering guide.

Otherwise, should it decisively clear the $100 Century Mark after previously failing to do so, it could trigger as a long at that point. However, it did this today when it reached an intraday high of 102.13 and reversed from there. If the other solars peter out on today’s gap-up moves, then look for FSLR to definitely head back to yesterday’s lows.

 

 

Small Solar/EV combination play VivoPower International (VVPR) pulled into its 20-dema on Monday on very light volume and then again on Tuesday morning where it offered a lower-risk long entry opportunity before blasting higher.

That was good for a 33% move in two days before it ran into resistance along the prior November and December highs and reversed today on heavy volume. Watch for pullbacks to the 10-day line as possible lower-risk entries from here.

 

 

I’m not inclined to buy into Chinese EV names just yet, although Nio (NIO) has had a very nice move since reporting strong sales on Monday before the open. It is now running into resistance along the prior late-November highs. Li Auto (LI), and Xpeng (XPEV) are trying to work things out along their respective 50-day moving averages, but the percolation continues as any significant resolution fails to show up.

LI may be buyable here along its 50-day line, but for all we know it ends up playing out like XPEV, which reversed back below its own 50-day line today. Meanwhile, NIU stalled and reversed at its 50-dma today where it in fact presented a lower-risk short-sale entry for anyone watching it. Overall, Chinese EV names look to me like they still need some work if they are to become viable again.

 

 

EV battery/charging names Ballard Power (BLDP), Blink Charging (BLNK), FuelCell Energy (FCEL) and Plug Power (PLUG) were mostly buyable at their 20-demas yesterday if one was watching. This led to some nice bounces back to the upside, but only BLDP was able to kiss new-high price ground before stalling. These would only become actionable again on pullbacks and retests of the respective 20-day lines.

 

 

Tesla (TSLA), the big-stock leader in the EV space, is not shown here on a chart but it is now extended beyond the $700 Century Mark where it was buyable per my comments over the weekend. It stalled today on heavy volume and closed near its intraday lows, so can be watched to see how well it can test and hold support at the $700 price level.

 

 

With NASDAQ 100 names under pressure today, most tech names had a difficult day, with semiconductors also contributing to the melee. My little group of four big-stock semis showed mostly negative action. Advanced Micro Devices (AMD) triggered as a short this morning when it breached its 20-dema and can be watched for weak rallies back up into the line as possible short-sale entries.

Marvell Technology Group (MRVL) slumped into its 20-dema today and should be watched for two-side outcomes here. Either it’s buyable here at the 20-day line while using it as a tight selling guide, or a breach of the 20-dema triggers this as a short-sale in a manner similar to AMD today.

Qualcomm (QCOM) is in a similar position where it may be buyable at the 20-dema (along with the 10-dma) with the idea that a breach of the line would flip this from long to short at that point. Qorvo (QRVO) posted an all-time high today on strong volume, which represents a base breakout and is therefore buyable on that basis as it remains within range of the prior 170.90 peak in the base.

 

 

Lumentum (LITE) cleared the $100 Century Mark yesterday on strong volume, triggering a long entry at that point based on Jesse Livermore’s Century Mark Rule for the long side. This remains within buying range using the $100 level as a selling guide.

Conversely, a failure at the $100 Century Mark could also trigger this as a short-sale entry if LITE can’t hold this latest move above 100. That was the case last week and we should now be alert to the 360-degree nature of the current action if it fails at the Century Mark.

 

 

Ambarella (AMBA), which has been a regular topic of discussion in my video reports for several months now, has cleared the $100 Century Mark for the first time. While today’s base breakout is extended from the 96.80 peak in the base, it is still within range of the Century Mark based on Livermore’s rule using the $100 level as a tight selling guide.

 

 

Cloud names continue to lag, and the best way to illustrate this is with a broad group chart of all the clouds I’ve discussed in more recent reports. That’s quite a Who’s Who of cloud leadership, but their charts look more like “Who cares?” as they fall out of favor over recent weeks and trend lower. Some, in fact, have triggered as short-sale entries over the past few days; study the charts closely and figure out which.

 

 

 

 

These are the short-sale triggers among the cloud stocks in the first chart: APPN at the 20-dema on Monday, BILL today at the 20-dema, COUP yesterday at the 20-dema, CRWD at the 10-dma today, DDOG at the 50-dma on Monday, DOCU at the 10-dma/20-dema confluence yesterday in the first group chart.

In the second group chart, the short-sale triggers over the past few days are as follows: DT at the 20-dema yesterday, FSLY at the 50-dma today, HUBS at the 20-dema on Monday, NET at the 20-dema on Monday, and Now at the 20-dema on Monday and the 50-dma today.

In the third and final group chart, short-sale entries occurred in: OKTA at the 20-dema on Monday, SHOP at the 20-dema on Monday and yesterday on the rally into the line, SNOW at the 50-dma yesterday, TTD at the 50-dma on Monday and again on the rally into the 50-dma yesterday, and ZS at the 20-dema today.

Did you find them all?

As I’ve said before, when the clouds eventually top, they will likely do so together, and thereby present a fertile area for alert short-sellers who know what to look for in terms of proper short-sale entry triggers. If this is a negative for the overall market environment and not just a rotation out of clouds and into stuff stocks, then we’ll find out soon enough.

Perhaps big-stock NASDAQ names are telling us something. My infamous S&P Five, with Netflix (NFLX) tossed in for good measure, illustrate where responsibility for today’s negative showing in the NASDAQ 100 Index lies. NFLX, along with Apple (AAPL), Amazon.com (AMZN), Facebook (FB), Alphabet (GOOG) and Microsoft (MSFT), all moved lower today on heavy or increased selling volume.

In fact, some also triggered as short-sales today. AAPL did so when it broke below the 20-dema, while AMZN and FB did so on breaches of their 50-day lines. NFLX was a short on the gap-down break below the 20-dema and is now sitting just below its 50-day moving average. GOOG meanwhile is sitting just below its 50-dma, where it may offer a short-sale entry right here using the line as a tight covering guide.

 

 

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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What was very striking about today’s action was the clear bifurcation between formerly leading groups like big-stock techs and clouds while stuff stocks and financials rallied. The primary question to be answered, in my view, is whether the rotation into stuff stocks is a temporary one, or something that develops into a sustained move that has at least some semblance of what we saw in 2006-2008.

That commodity-related stuff stock boom resulted from the easy monetary policies of the late 1990’s and early 2000’s. It was fueled by speculation-inducing liquidity and the economic bounce-back that occurred after the 9/11 terrorist attacks.

Today we may be seeing a similar bounce-back as the virus crisis potentially recedes against a backdrop of massive liquidity, but there are still many unknowns regarding second- and third-order effects of businesses that have shut down and consumer behavior which may in some cases have been permanently altered as a result of the lockdowns and the general viral experience.

So, remain alert. And if you’re oriented toward the short side you may also find some weak points in the market to attack, such as the clouds have offered over the past couple of weeks. 2021 is just getting started, and we can only hope that the rest of the year will be as interesting as the last three days have been.

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 GOLD, though positions are subject to change at any time and without notice.