The Gilmo Report

July 14, 2021

July 14, 2021 7:37 pm ET

Hot inflation remains the order of the day with a 0.9% increase in the Consumer Price Index reported on Tuesday followed by a 1.0% Produce Price Increase reported today. About 0.42% of the CPI number was due to used car price increases. But even with that taken out of the equation it would still have met expectations of 0.5%.

The market spent most of the day yesterday arguing with itself over the significance of the CPI number. By the close we saw the major market indexes reverse in bearish fashion on higher volume following a poor 30-Year Treasury auction.

The PPI number this morning had no such exceptions in the data and the year-over-year number of 7.3% was the highest since November 2008. Futures decided it wasn’t a problem, however, and off we went to the upside at the opening bell. The NASDAQ Composite and S&P 500 gapped up near yesterday’s intraday highs, and the big churn was on from there with the NASDAQ stalling and reversing to close negative on slightly lower volume. Meanwhile, the S&P churned and stalled to close slightly higher on slightly higher volume.

 

 

The daily chart of the NYSE Composite Index gives the broader picture as it pulled an outside reversal day to close in the red on higher volume. As the headline indexes have made new highs, the NYSE Composite remains stuck in a roughly two-month consolidation where it has repeatedly run into resistance along the highs. The net result is that we remain in a seat-of-the-pants environment that is more suited to short-term swing-traders and day-traders than it is intermediate-term trend followers.

 

 

Precious metals move higher today with the Sprott Physical Gold Trust (PHYS) gapping through near-term resistance at the 20-dema on the approach to the underbelly of the 200-day line. The move did not qualify as a buyable gap-up, however.

The Sprott Physical Silver Trust (PSLV), meanwhile, is again meeting up with near-term resistance along its declining 20-dema. A convincing move up through the line would perhaps be a bullish sign, but in this market we often find that obvious bullish or bearish confirmations are often far less than 100% reliable.

For now, pullbacks to the 20-dema in the PHYS and pullbacks to the 200-day moving average in PSLV would be your lower-risk entry points. However, tread carefully and stay nimble if you plan on buying these since a general market sell-off could easily drag down the metals as it already has the miners and metals-related names.

 

 

To illustrate my point, four examples of the action in gold and silver miners Agnico Eagle Mines (AEM), First Majestic Silver (AG), MAG Silver (MAG), and Newmont Mining (NEM) all reversed at logical, shortable resistance today, and all four have been in protracted downtrends. While a small handful are rallying more sharply lately, such as Kirkland Lakes Gold (KL) (not shown), for example, the overall moves may simply bring them into shortable resistance. I remain cautious on the precious metals-related names for now, pending further evidence.

 

 

The best trade of the week for you seat-of-the-pants traders has been Virgin Galactic (SPCE), which gapped up Monday morning after a successful test on Sunday that saw Sir Richard Branson become the world’s first Billionaire Astronaut. This was, in my view, a clear, sell-the-news, short-sale opportunity from heaven, or at least low-orbital space. Once the company announced a $500 million secondary offering not too long after the opening bell, the stock’s wings were fully clipped, and a fiery re-entry ensued.

SPCE was trading in the pre-open Monday morning at around $55, a reasonable short-sale entry point based on the five-minute 620-chart at that time. From there, it streaked below the 20-dema and triggered short-sale entries at both the 10-dma and the 20-dema on the way down. At that point, the 20-dema becomes a convenient trailing stop.

The final splashdown at the deep blue 50-day moving average today brings it to a logical, initial downside profit objective and cover point after a 40% bust in three days. Nice work if you can get it!

 

 

While the SPCE trade worked well, another trade possibility I discussed in my weekend report in 3D Systems (DDD), worked entirely differently. Over the weekend the stock was sitting right on its 20-dema after a shakeout at the line on Thursday and Friday. That was a typical moving average undercut & rally (MAU&R) that, as I teach, is actionable as a long using the 20-dema as a tight selling guide. Unfortunately it was only good for five minutes on Monday morning.

At the bell, DDD was sitting right at its 20-dema. In the first five minutes of trade it suddenly launches from an opening price of 34.60 to what turned into an intraday peak of 35.98 and just below the 10-dma. If you were watching the five-minute 620-chart, this is what it looked like. You can see the sudden spike and reversal that sent the MACD and the moving average into immediate bearish crosses, signaling a potential short-sale entry in real-time.

 

 

Not too long after the initial reversal five minutes into the trading day, Three D Systems (DDD) then quickly broke below the 20-dema for another short-sale entry trigger. Yesterday it closed just above the 50-day line, not an unreasonable short-sale profit-objective/cover point. Today, however, DDD briefly rallied before dumping below the 50-day line on heavy selling volume.

That can be viewed as a fresh short-sale entry at the 50-day line with the idea of using the line as a covering guide. What is instructive about this example is the way a long set-up quickly flipped to a short-sale set-up that was immediately and substantially profitable, with an end-to-end 18% break on Monday and Tuesday alone. This is a prime example of how the 360-degree trading approach I advocate works in real-time.

Using the methods that we have at our disposal, it was not that difficult to see the shift in a long set-up at the open on Monday back to the short-side as the set-up flipped. This is a classic 360-degree situation, where following the set-ups as they shifted in real-time produced excellent results.

 

 

What was notable about today’s action was the slight change in character observed among leading groups. The bifurcated nature of the current market environment is old news at this point, and a fairly accurate description of the day-to-day movement among leading and lagging areas. Lately, stuff-stocks have taken a licking, while clouds have kept on doing what clouds normally do best, which is hang up in the air. That seemed to change slightly today, however.

I wrote over the weekend that, “Cloud names have remained mostly unflappable.” Over recent days we’ve seen a trickle of cloud names start to break below near-term support along their 10-day and 20-day lines, and today that type of action broadened out a bit among stocks in the cloudy regions of the market that I monitor. These names can be found on the Cloud spreadsheet tab in the latest Watch List Spreadsheet file available in the Premium Members’ section of the website.

Avalara (AVLR), CrowdStrike (CRWD), DataDog (DDOG), and DocuSign (DOCU) will follow AVLR through their 20-demas, but if they do, and as they do, they will trigger secondary short-sale entries at that point. Otherwise, we can watch for weak rallies back up into the 10-dma as we saw in AVLR on Monday before it came apart today.

 

 

Other examples from my cloud watch list include Bill.com (BILL), CloudFlare (NET), Atlassian (TEAM), and Twilio (TWLO), where we see a reversal on a failed breakout attempt in BILL, a break below the 10-dma and down to the 20-dema in NET and breaks below the 20-dema in both TEAM and TWLO. The last two can be viewed as initial short-sale entries here below their 20-day exponential moving averages which then become your covering guides.

 

 

The cloud names that were already weakening, as discussed in the most recent reports, continued their roll-over style breakdowns today. These were breaking near-term support at their 10-day and 20-day lines over the last 1-2 weeks. They could show how the cloud names above might play out if the group continues to come under selling pressure after some strong moves off the May lows.

One example, Nutanix (NTNX), presented shorts with an entry at the 10-dma on Monday when it failed on an MAU&R attempt from last Thursday at the 20-dema. While the move into the 10-day line was shortable, it eventually triggered a short-sale entry at the 20-dema and has not looked back since.

A small rally this morning offered another short entry near the 20-dema, and NTNX broke further to the downside as the 50-dma looms just below. From here I’d be looking for a test of the 50-day line down below, which would also serve as a potential profit objective/cover point with the 20-dema as your trailing stop.

 

 

There are some similarities between NTNX and MongoDB (MDB), mainly the secondary short-sale entries at the 10-dma following MAU&R moves at the 20-dema. MDB had one a week ago, and that sent the stock below the 20-day line, before it rallied once more into the 10-dma on Monday and Tuesday of this week. Those moves provided secondary short-sale entries and MDB broke lower again today.

For now, moves back up into the confluence of the 10-dma and 20-dema would offer lower-risk short-sale entries from here. One would then use the two moving averages as covering guides, and the 50-dma down below could also serve as a reasonable profit objective/cover point if this continues to play out as a working short position.

 

 

I discussed Coupa Software (COUP) over the weekend as a possible short-sale entry at the 10-dma, despite not necessarily having high hopes for the trade. But as we know in the stock market, opinions and feelings are like…well you know the answer. COUP hung around the 10-day line briefly on Monday morning before busting lower from there and then triggering a second short-sale entry at the 20-dema today.

Note how it only took a couple of days off the peak for COUP to change character completely after running into price resistance along prior April highs where the initial short-sale entry was. Now it’s headed for the 50-day line which can serve as a potential profit-objective/cover point from here if it eventually meets up with the line.

 

 

Roblox (RBLX) and Upstart (UPST) are recent IPOs that we’ve been following in the reports for a while now, but they can also be considered cloud names. These have come apart this week, with RBLX pulling a nice stalling reversal at its 10-dma and 20-dema on Monday and Tuesday before slicing through the 50-day line today. The short entries this week were at the 10-dma/20-dema confluence first, and then the 50-dma today, which now serves as a trailing stop.

Note also that RBLX is now a confirmed, late-stage, failed-base (LSFB), short-sale set-up in progress. This is confirmed by today’s break below the 50-day line as well as below the prior base breakout point. In addition to this current, evolving LSFB short-sale set-up, remember that RBLX was originally a Jesse Livermore Century Mark Reversal short-sale set-up in early June around $100, which you can read about in further detail by looking up archived reports from early June.

 

 

Upstart (UPST) illustrates the futility of chasing strength in this market after posing a strong-volume pocket pivot through the 10-dma and 20-dema on Monday. That was the proverbial one-day wonder trade, and the stock immediately triggered as a short-sale entry on the reversal back below the 50-day moving average yesterday.

A second trigger occurred today at the 10-day line, and UPST headed lower from there. A great example of how big-volume upside strength on one day often does not mean a thing in this market with respect to fueling further upside. This is the foundational principle behind why I refrain from chasing strength on the upside just as I refrain from chasing weakness on the downside.

 

 

U&R moves off the lows of last week in semiconductor equipment makers Applied Materials (AMAT), Brooks Automation (BRKS), KLAC Corp. (KLAC) and Lam Research (LRCX) ran into stark resistance today. AMAT triggered a short-sale entry at the 20-dema, which then becomes a covering guide, while KLAC and LRCX triggered short-sale entries today at their 10-day, 20-day, and 50-day lines where the 50-day line now serves as a covering guide/trailing stop.

BRKS remains the laggard as it posted a lower closing low today after reversing at its 10-dma. Its U&R attempt was an overall weak showing, but from a group perspective the action looks particularly bearish.

 

 

Micron Technology (MU) and Western Digital (WDC) gave shorts their big second chance after issuing clear cover signals last week. MU broke down to its 200-dma while WDC undercut a prior low, both representing cover points for prior shorts taken up higher in their patterns as discussed in recent reports. Once those cover signals appear, we then wait for rallies into moving average or price resistance, whereupon we can consider shorting them again.

Both MU and WDC have played out in textbook fashion in this regard, with rallies right up into the 50-day lines this morning where they became shortable again. They then reversed to close near their intraday lows. These are textbook short-sale set-ups that break down to a cover point at either moving average support or a prior low (where a U&R then occurs), resulting in a rally back into near-term resistance that then offers a short-sale re-entry into the rally.

It’s rare for anything to act textbook in this market, but we’re seeing the semiconductors act like textbook short-sale set-ups right here, right now. In the process, I find that the short side of this market is acting quite orderly from the perspective of how cover points, U&Rs or bounces off support, and then rallies that become shortable again, all work in an overall short-sale target stock.

 

 

Himax (HIMX) and Kulicke & Soffa Industries (KLIC) are both semiconductor equipment-makers with similar, recent breakout failures that are playing out as late-stage or later-stage, failed-base, short-sale set-ups. HIMX was the first to fail and has been bouncing along its 20-dema. Today it attempted to clear the original breakout point (dotted line) and failed, reversing back below the 10-dma and triggering a short-sale entry at that point.

HIMX is now sitting on top of the 20-dema again, and a break below the line would trigger a second short-sale entry if it occurs. KLIC was a bit simpler in that it just rallied right into its 20-dema today where it offered a clean short-sale entry at the line and then did a complete about-face, heading lower from there.

 

 

Industrial metals were a complete bust today, with four of the five names shown below triggering short-sale entries at various moving averages. Alcoa (AA), which is expected to report earnings tomorrow after the close, was a short-sale entry at its 20-dema this morning before reversing to close negative.  Cleveland Cliffs (CLF) reversed on a failed, low-range, base breakout and closed right at its 10-dma and 20-dema. If it busts the two, then it would trigger a short-sale entry at that point.

Freeport McMoRan (FCX) just rolled over from the underbelly of its declining 10-day line where one could have shorted it using the line as a covering guide. Steel Dynamics (STLD) is at its 50-day line, so is a short here using the 50-day line as a covering guide and U.S. Steel (X) gave shorts a shot on the early rally this morning up into the 50-day line where it turned tail and closed in the red.

Industrial metals names will all be reporting over the next week or so, with AA leading the group off tomorrow. I’m watching for anything actionable to show up after AA reports, not only in AA, but also in any other industrial metals names that move in sympathy.

 

 

At this point, we can take a quick time out to notice two common characteristics among all the names that I’ve discussed so far. The first is that almost all of them set up as short-sale entries today. The second is that I’ve been discussing and focusing on all of these names in recent reports. The moral of the story is simple: You do not need to monitor every stock in the market to find the right set-ups at the right time.

This is consistent with my advocating an approach whereby one sticks to a short list of stocks to watch every day. The names I’ve discussed in recent reports have been more than sufficient as a reasonable pool of names to monitor and play according to the precise set-ups appearing in real-time.

In this regard the fertilizer names I’ve followed in recent reports are no different. CF Industries (CF) was shortable today at its 10-dma and Mosaic (MOS) at its 20-dema, and both stocks reversed to close lower on the day. Nutrien (NTR) was a different type of set-up since it ran into price resistance instead of moving average resistance on a little double-top, short-sale set-up that saw the stock reverse an early upside move at prior price resistance to close in the red and near the intraday lows.

 

 

Beyond Meat (BYND) never gave shorts another chance at a short entry near the 200-dma as it has now traded down every day this week. It broke below the 50-day line today, triggering a second short-sale entry where we now use the 50-dma as a covering guide and/or trailing stop.

 

 

FOMO names in general haven’t had a good week, or even a good July, so far. The various electric vehicle-relate names I discussed back in my July 7th report have continued to break down. Below are the electric-vehicle battery/charging names, and they just keep getting uglier all the time after triggering short-sale entries back when I first discussed them in my reports.

 

 

Chinese electric-vehicle names have also continued to roll over after some strong runs off their May lows. Today we saw Li Auto (LI) and Niu Technology (NIU) trigger short-sale entries at their 20-dema and 50-dma, respectively, although NIU also busted its 10-dma and 20-dema. The other two, NIO (NIO) and Xpeng (XPEV), have broken down to their 200-dmas where we might watch for shortable bounces up into moving average resistance up above.

 

 

The fact is that today most stocks in this market are having a rough time. Meanwhile, the algos can drive the indexes higher by piling into a narrow group of big-stock names like the proverbial S&P Five, Apple (AAPL), Amazon.com (AMZN), Facebook (FB), Alphabet (GOOG), and Microsoft (MSFT). These stocks have been bullet-proof for the past month as they have marched higher, helping to drive the NASDAQ Composite, S&P 500, and NASDAQ 100 to new highs in the process.

 

 

Are these rides about to reach a terminus with earnings looming in about two weeks’ time? We’ll know if and when the 10-day lines are breached, but so far that has only occurred in FB, as it again tests its 20-dema. The rest have yet to break below their steepening 10-day moving averages, but in my view this is now something to watch for.

Certainly, the short side of most stocks in this market gained bold prominence today as these big-stock names continue to prop up the indexes. The question then becomes whether the current narrow leadership represents the next shoe to drop and finally take the major headline-grabbing indexes down with the rest of the market.

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

 

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.

____________________________________________________________