The Gilmo Report

July 11, 2021

July 10, 2021 1:07 pm ET

There are times when it is difficult to take this market seriously, given its capricious and sometimes bizarre tendency to forget what it just did the day before and streak maniacally in the other direction. I have likened it to a mad person who runs screaming toward the edge of a cliff before suddenly stopping, looking over the edge, and then running back the other way, all while screaming even more loudly.

I suppose this is just another anthropomorphizing of the action of a schizoid, chop-fest of a market where there is little to be found in the way of major, sustained trends, outside of the major market indexes.

However, it all makes perfect sense if one realizes that the action is not the product of normal institutional accumulation and distribution at work. It strikes me as more typical of roving packs of algorithm-driven machines scurrying to and fro, often in contradictory and contrarian fashion on a day-to-day basis. This is the essence of why Ugly Duckling long set-ups like the price and moving average U&R work, and the fact that these days I find the standard Technical Analysis 101 double-top formation the most effective short-sale formation to look for.

Even something as strong on the upside as Advanced Micro Devices (AMD) eventually reaches a prior peak and then breaks 10% in two days before finding support at its 20-dema. The double-top becomes a shortable position after long entry signals occurred along the lows of the pattern over three weeks ago. AMD is trying to figure out where it wants to go next as the 20-dema presents near-term support. These days, this is how the market really works, and one must adjust their tactics accordingly.

 

 

There once was a time when, if I had a quick 10-20% profit in something that I had just bought, I would be looking for places to add to and build that position in anticipation of a bigger, trending move. These days, if I have a sudden and big profit in something I just bought or shorted, I start looking for the exit door.

Objectively, this market environment continues to reinforce that approach. We can sum it up to one simple rule that I preach regularly: Because this tends to be a contrarian market, do not chase strength on the long side, and do not chase weakness on the short side. Neither is an indication or confirmation of continued price movement in the same direction.

The market story over the past two trading days has been one that is consistent with this concept. The indexes all gapped down brutally on Thursday morning, but found their feet to bounce and close relatively well off the intraday lows. Friday, everything gapped higher, with a broad number of beaten-down stocks bouncing off oversold lows. This all sent the Dow and the NASDAQ Composite to all-time closing highs and the S&P 500 to an all-time high.

On the daily chart of the NYSE Composite Index below we can see how this played out with respect to the broader market. A huge gap-down break on Thursday followed by a quick and thorough rebound back up toward the highs of a two-month consolidation on Friday. Volume was lighter compared to Thursday, meaning also that the major market indexes made all-time highs Friday on lighter volume.

 

 

Airline stocks illustrate what was going on in many areas of the market on Thursday and Friday. Ugly, deteriorating downtrends suddenly sprang to life, but the overall trend and/or choppiness has not been changed.

 

 

We can see this type of action at work in a number of cyclicals as well. Union Pacific (UNP) also shows the carnage that hit the railroad names on Thursday after President Biden said he was going to go after anti-competitive practices in the sector through an executive order. One can also pick out U&R type of action on Thursday in CF Industries (CF) and U.S. Steel (X), and if one was intrepid enough to step in on those one could have participated in today’s gap moves higher.

 

 

Financials took inspiration from a slight bounce in interest rates Friday to rally, so perhaps had a better reason to rally, assuming anything needs a reason, as in a logical rationale, to do anything in this market. Nevertheless, their price action had a similar look to it, with brutal sell-offs into Thursday’s gap-down break preceding a gap-up bounce on Friday.

Every single one of the big-stock financials shown in the group chart below are expected to report earnings this week, with Goldman Sachs (GS) and J.P. Morgan (JPM) kicking things off on Tuesday morning. These may have set the tone for the sector, as well as have their usual general market influence, so they will be earnings reports to watch closely.

Bank of America (BAC), Citigroup (C), and Wells Fargo (WFC) are expected to report Wednesday morning, while Charles Schwab (SCHW), Morgan Stanley (MS), and U.S. Bancorp (USB) are expected to report Thursday before the open.

 

 

Travel/Leisure stocks also illustrate the ugly trends preceding Friday’s big oversold bounces. The re-opening trade has been over for a while, and these charts certainly confirm that. You will note, however, some U&R action in some of these (dotted lines) on Thursday ahead of Friday’s gap-up bounces. I would not assume necessarily that these U&Rs are going to lead to glorious new uptrends in these stocks, but perhaps tradeable bounces that eventually resolve into new short-sale entries somewhere higher in the patterns at logical price or moving average resistance.

 

 

One anomaly that we saw in the pre-open on Friday was that precious few were trading higher overnight while stock futures were plummeting. As the morning wore on, the gains in the precious metals had dissipated, but the U&R long entries from last week still remain in force, with the 13.93 level for the Sprott Physical Gold Trust (PHYS) and the 9.15 level for the Sprott Physical Silver Trust (PSLV) serving as selling guides.

The PHYS ended the week at 14.28 while the PSLV finished up at 9.21. So for now, if one is long these from the U&Rs of last week, then those remain your maximum selling guides. Note also that near-term resistance lies at the 20-day exponential moving average for both.

 

 

I don’t know about anyone else, but the highlight of my weekend will probably be the livestream of the Virgin Galactic (SPCE) test-flight this Sunday, July 11th. Unity 22 is scheduled to take off at 6:00 a.m. my time here on the West Coast with the swashbuckling entrepreneur and SPCE founder Richard Branson on board. You can watch the livestream here. If I were a betting man, which I suppose I am to some extent, I would say the flight goes as planned.

The tricky part then is whether it becomes a sell-the-news situation for the stock. Whatever happens, my guess is that it will be a gap move one way or the other, and we can decide what to do, if anything, once we see the stock start trading on Monday morning. Meanwhile, SPCE rests comfortably on its 10-day moving average after finding some volume support at the 20-dema on Thursday.

 

 

When we consider Thursday’s market action, we must also remember that short-sale target stocks were already coming down earlier in the week at the latest. For example, we know that Micron Technology (MU) and Western Digital (WDC) were both actionable short-sale set-ups and entries the prior week and earlier this past week at resistance and trigger points along their 20-day exponential moving averages and their 50-day moving averages.

By Thursday, MU was bouncing off deep support at its 200-day line and WDC was pulling a U&R long entry move at the prior 67.54 low of June 22nd.

Now we’ll see whether these oversold rallies run into overhead resistance if and as they rally further from here. The main point, however, is that short-sale targets like these were already working over a week ago. By Thursday’s big gap-down market open, they were quite extended to the downside near logical U&R price lows for WDC and 200-day moving average support for MU. Thus it was quite possible to declare victory, cover your shorts in these names, and hang out.

 

 

The same exact concept applies to semiconductor equipment makers where we saw Applied Materials (AMAT), Brooks Automation (BRKS), KLAC Corp. (KLAC) and Lam Research (LRCX) all come down and pull U&R moves along prior lows in their pattern. With respect to BRKS, I had already noted in my Wednesday report that it was undercutting a prior June low in the pattern which would be my cover point. If you didn’t cover Wednesday, then a gap-down move through the May low was your second chance to do so on a true U&R move.

The other three have rallied from U&R lows set on Thursday, but only AMAT is back above its 50-day line. Technically, this can also be viewed as a shakeout at the 50-dma, a moving average undercut & rally (U&R) long entry signal using the 50-day line as a tight selling guide. KLAC and LRCX, meanwhile, can be watched for weak rallies into their 50-day moving averages where they could present short-sale re-entry opportunities, depending on how they play out.

 

 

Himax (HIMX) and Kulicke & Soffa Industries (KLIC) are another variation on a theme as recent failed breakouts. HIMX shook out at its 20-dema on Thursday and closed above the line before successfully testing and bouncing off the 20-dema on Friday. That creates an MAU&R long entry using the 20-dema as a selling guide.

KLIC is the weaker of the two, but on Friday was able to pull off a U&R at the prior 52.47 low. It did, however, close below the 50-day line on weak volume, so may also play out as a short-sale entry right here using the 50-dma as a covering guide. Otherwise, if one is bullish on the stock, the U&R would be your reference using the 52.47 low as a selling guide.

 

 

When the big-stock NASDAQ names Apple (AAPL), Amazon.com (AMZN), Facebook (FB), Alphabet (GOOG), and Microsoft (MSFT) all gapped down on Thursday morning, the possibility of further downside in these names dragging the market lower was certainly real at that point. But once they held near-term support, specifically FB at the 20-dema and GOO and MSFT at the 10-dma, and bounced, it was hard to make the bearish case at that point.

Of the five, FB was buyable at the 20-dema while GOOG was buyable at the 10-dma and the top of its prior base on Thursday. Keep in mind that all five stocks are expected to report earnings in the final week of July, so it’s not necessarily clear to me that I need to be in these stocks at this point, one way or the other, until earnings are out.

 

 

I’ve already shown and discussed the chart of U.S. Steel (X), so in the usual industrial metals group chart I’m replacing it with Steel Dynamics (STLD). In any case, we can see the bounces over the past two trading days in these names. You can see clear U&Rs in Cleveland Cliffs (CLF) and Freeport McMoRan (FCX) on Thursday, and also a moving average U&R in CLF which shook out at its 50-day moving average.

Alcoa (AA) also has a bit of a U&R going on here, but the rally has taken it up to its 50 -day line ahead of this Thursday’s expected earnings report after the bell. AA might have an effect on other industrial metals names, particularly the other aluminums, so watch for sympathy moves within the group. Otherwise, I see nothing to do here ahead of earnings.

Steel Dynamics (STLD) rallied up to its 50-day line on Friday and stalled, but I also see nothing do here ahead of the company’s expected July 20th earnings report. However, one could view this as a short entry spot if it reverses back below the 50-day line with the idea of catching a quick scalp ahead of earnings while using the 50-dma as a covering guide.

 

 

Fertilizers are also engaged in the obligatory oversold bounces with CF Industries (CF) posting a U&R on Thursday before running into resistance at its 20-dema on Friday. Mosaic (MOS) also posted a U&R on Thursday and then rallied into its 20-dema on Friday on weak volume. In both cases, the rallies into the 20-day lines may offer lower-risk short-sale entries using the 20-demas as covering guides.

Nutrien (NTR) had a U&R of its very own on Thursday as well, and unlike the other two was able to regain its 50-dma, 20-dema, and 10-dma. However, volume was weak, and the move carried as far as prior price highs in the 61-62 price zone. I’d want to see how well this can hold the 50-day line since a break back below the line would trigger a possible short-sale entry.

I would tend to look for some opportunistic rallies from here if I were intent on shorting them at this stage of their breakdowns. Also keep in mind that they will all be reporting earnings in early August.

 

 

Cloud names have remained mostly unflappable. I noted in my Wednesday report that if they did start to break down through near-term support en masse it would likely have to occur within a general market correction. That was proven out marginally on Thursday morning when all the cloud names I’ve discussed in recent reports gapped down hard at the open, but by the close were in rapid recovery mode.

Nutanix (NTNX) gapped below its 20-dema, but quickly shook out at the line to close back on the top side, constituting a shakeout at the 20-dema which could then be played as a moving average undercut & rally using the 20-day line as your selling guide. It held support at the line on Friday and closed up on light volume. Still a two-side situation since a breach of the 20-dema could trigger it as a short-sale target if it occurred, while continued support at the line can be viewed as buyable until and unless the stock busts the 20-dema again.

 

 

MongoDB (MDB) continues to live below its 20-dema, but note the mini-U&R on Friday along the prior 345.46 low of this past Monday. I call it a “mini” U&R because it occurs at a very recent low. The rules are the same as with any other U&R as the term simply refers to the recency of the prior low and nothing else.

At the same time, MDB is running into resistance at its 20-dema. So, initially I might view this as a short-sale point using the line as a covering guide. If it can regain the 20-dema, then it could play out as a long entry at the line which conversely then becomes your selling guide.

 

 

Coupa Software (COUP) closed below its 10-dma on Friday after attempting to rally early in the day. It gapped down on Thursday after reversing along prior price highs on Wednesday. Initially, this can be viewed as a short-sale entry here using the 10-day line as a covering guide. That said, the optimal short-sale entry occurred on Wednesday when the stock reversed at prior price resistance.

 

 

Meanwhile, I can’t find fault in cloud names that continue to hold up very well along near-term resistance. Examples from my Cloud Focus List would include Bill.com (BILL), CrowdStrike (CRWD), DocuSign (DOCU), and CloudFlare (NET). Notably, BILL and NET held support on big shakeouts down to their 20-demas on Thursday and are now back above their 10-day lines.

In cases where these stocks are holding tight along their 10-day lines, the longer they do so and the more volume dries up, the more they become potential long entries at the 10-dma. I have to say I certainly like the look of DOCU and NET, each showing a series of tight daily closes as volume dries up. This may indicate they are revving to move higher as long as the general market indexes continue to rally.

 

 

In the realm of former FOMO names gone bad, Beyond Meat (BYND) remains a short-sale target on weak rallies back up into its 50-day moving average. Note that the prior break following the failed breakout was of a sufficient magnitude that we might look for the stock to at least spend some time testing the underbelly of its 50-day line before moving over, so keep that it mind.

 

 

Elsewhere in former FOMO land, we can see that Three D Systems (DDD) posted a pocket pivot and a moving average U&R at its 20-dema on Thursday. It then held tight and closed one penny above the 20-day line on Friday as volume contracted to -72.6% below average. Note that it is also holding right above the prior range breakout point. This sets up a long entry here while using the 20-dema or the Friday low at 33.31 as your selling guide.

 

 

Roblox (RBLX) remains mostly indecisive but continues to hold support at its 50-day moving average and the top of its prior base breakout. However, it still can’t get past the 20-dema, so remains in a type of no-man’s land here where it provides opportunistic entries on the long side at the 50-day line and potential short-sale entries on moves up into the 20-dema.

If the general market remains bullish, I would probably lean toward looking for pullbacks closer to the 50-day line as opportunistic entries. At the same time, I would prefer to sit back and wait for a clean break of the 50-day line as a short-sale trigger if I were intent on shorting the stock. For now, all it appears to be doing is building a second base, about 20% deep, on top of its prior base formed between mid-April and mid-May.

 

 

Upstart (UPST) is still trapped in the bear flag it has been forming since mid-June with no significant resolution as of yet. As I’ve said before, it has been buyable along the lows of this one-month price range and shortable at the highs along the 20-dema. Note the U&R at the prior 144.20 low on Thursday that led to a weak stalling move up into the highs of the range and the 10-day line, with the 20-dema and 50-dma looming just above.

Given that UPST remains a late-stage, failed-base (LSFB), short-sale set-up, I’m still inclined to short it as close to the 50-day line as possible, which then becomes your covering guide. That said, the Thursday U&R remains in force, but the stock is extended from the 144.20 entry point. Thus, it is not in an actionable position pending either a test of the 144.20 prior low as a possible long entry or the 50-dma on the upside as a possible short entry.

 

 

Ammo, Inc. (POWW) is an interesting potential trade as a small ammunition maker now that it has pulled back to its 20-dema. I’ve been following this one for a while and recently discussed in my video reports, but it has mostly been out of buyable range until now. On Friday, POWW undercut the prior 8.15 low of two weeks ago and the 20-dema, and rallied to close at 8.28. That created a U&R long entry at the 8.15 low and a possible MAU&R at the 20-dema, although one can simply use the U&R low at 8.15 as a practical selling guide.

 

 

If there were any lessons to take away from the market action this past week, they were that first, this market suffers from multiple personality disorder (but that’s not news at this point) and second, that despite the index action it all still comes down to the individual stock set-ups. The time to get short was not on Thursday when everything gapped down sharply at the open and looked primed for disaster. Short-sale set-ups were already in play as much as two weeks prior to the Thursday break.

By the time the market gapped down on Thursday, many of these short-sale targets were roaming around in U&R Land. At that point, as was the case with primary targets like BRKS and WDC, we were reaching potential cover points. The question now is whether these oversold rallies that began on Thursday have legs, or whether they simply push up into overhead resistance and roll over again.

As we move into earnings season this week, we may see more resolution in this regard. At the very least, I look forward to the usual set of high-velocity, high time-value set-ups occurring after earnings. This is where my focus will be, along with my usual process of sifting out actionable set-ups without bullish or bearish bias. I’ll have more to say about this in my weekend video report.

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

 

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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