The Gilmo Report

July 17, 2022

July 17, 2022 4:42 am ET

A volatile week ended with a raucous options expiration day on Friday, where the Dow Jones Industrials led with a 2.15% gain as economically-sensitive names and financials rebounded. Beaten-down semiconductors also contributed with mostly low-volume rallies despite options expiration. Better-than-expected retail sales, which are not adjusted for inflation, consumer sentiment and Empire State Manufacturing Index reading added to the generally volatile OpEx activity.

 

 

Bearish sentiment among retail investors remains at elevated levels. Note, however, that while the American Association of Individual Investors Bears Index remains at elevated levels at or highs not seen since the 2008-2009 bear market and financial crisis, the market has not been able to mount much of a rally off the recent lows.

 

 

On an institutional level, the National Association of Active Investment Managers Exposure Index shows that active money managers remain positioned bearishly. Long exposure remains at or near the lows of 2022 and not too far from the lows seen in March of 2020. And yet, still, the market has not set off on a massive, short-covering rally based on extreme levels of bearish sentiment or bearish positioning.

 

 

I suppose we could be generous and say that the jury is still out on this, but despite the choppy daily and intraday movements, the indexes remain in bear flags. Bear flags, of course, can resolve in either direction, just like bullish bases can. While it is doubtful whether a glorious new bull market is in progress, one still cannot entirely discount the possibility of a typical bear market rally developing any point along these current lows.

The NASDAQ Composite rallied to the highs of its current bear pennant type of formation on Friday, and despite OpEx not posting a big volume spike on the day. Overall, while Friday’s move looked impressive, the index is still stuck below its 50-day line which now serves as a near-term reference for overhead resistance. It may be setting up for a move through the line, with earnings season serving as the deciding factor one way or the other.

 

 

The 10-Year Treasury Yield ($TNX) remains in a downtrend and below its 50-day moving average while the U.S. Dollar ($USD) remains in an uptrend. This is an interesting divergence as a rising dollar is more likely to correlate to rising interest rates. Instead, the reverse has been true as the $TNX ended the week at 2.93% while the $USD is sitting near 20-year highs.

If I am looking for confirmation of the wild card theory in the action of interest rates and the dollar, then interest rates are coming in, as expected, but $USD is heading higher and not lower as I would expect. A good deal of this, as I have said before, is due to weakness in the Euro ($EURUSD) and the Japanese Yen ($JPYUSD).

 

 

The action this past week highlights the fact that this remains a seat-of-the-pants market. With no real trend developing in either direction, swing-traders and day-traders are left to flipping pancake trades back and forth. And it is not necessarily an easy task, as I have noticed that success with any trade that I put on seems to have a large luck factor involved. At times one can get the feeling that they are just throwing darts and hoping for the best.

There is still no confirmation of the wild card theory to be found in the action of precious metals, but I must say that the miners have made for nice short-sale targets over the past couple of weeks. We can quickly see that the Sprott Physical Gold Trust (PHYS) and the Sprott Physical Silver Trust (PSLV) remain in free-fall as gold tests the $1700 level and silver approaches the $18 level.

 

 

I noted in my Wednesday report that the undercut & rally (U&R) and pocket pivot moves in miners that day could simply turn out to be shortable shake-in action, and that turned out to be the case. Below we see Gold Fields (GFI) become a short at the 20-dema as it broke out to lower lows on Thursday.

It is now hovering along the lows of the bear flag, where rallies into the 10-day or 20-day line could become shortable. I would, however, maintain a 360-degree approach here as U&Rs along the lows combined with recovery moves in gold and silver could carry the day as long entries. GFI did end the day just above the 8.72 low of July 5th a U&R long entry using 8.72 as a selling guide.

 

 

First Majestic Silver (AG) posted a pocket pivot volume signature on Wednesday but failed on a U&R attempt. That turned into a short-sale entry at the 10-dma that day and it was again shortable at the 10-day line on Friday. I was skeptical of these moves in GFI and AG on Wednesday, and indeed they played out as short-sale targets.

Specifically, I wrote on Wednesday, “As with GFI, this [AG move] may simply become a shortable move here along the 10-day line and just below the 20-dema. A failed U&R combined with a single five-day pocket pivot is not enough to call a turn to the upside here as this may very well remain a bear flag situation set to move lower after the “pullback” to the bottom of the prior bear flag.”

AG, like GFI, is attempting to hold a U&R it posted on Thursday along the 6.55 low of July 5th. It closed Friday at 6.89 after posting an intraday low at 6.64 as it successfully tested the 6.55 low. The miners and related names that I follow appear to be trying to find bottoms, but that is not going to happen until and unless we see a meaningful turn in the metal themselves, in my view.

 

 

Among big-stock financials that have reported earnings this past week, Citigroup (C) and Wells Fargo (WFC) both posted pocket pivots at their 10-dma and 20-dema after reporting Friday morning. C pushed past its 50-day moving average as well on the heels of a strong report and is now extended unless one wants to buy the stock here above the 50-day line and use that as a tight selling guide. Otherwise, I would watch to see how this holds up on any pullback to the 50-dma once all the post-earnings excitement wears off.

WFC did post a pocket pivot at its 10-day and 20-day lines but failed to clear the 50-dma. This could set up as shortable resistance, so can be watched for that. J.P. Morgan (JPM) and Morgan Stanley (MS), which reported on Thursday morning did not post pocket pivots on Friday given the large downside volume bar the day before. We will find out whether 20-dema resistance for JPM and 50-dma resistance for MS is meaningful this week.

Note that on Monday morning we are expecting earnings from three big-stock financials. Those would be Bank of America (BAC), Goldman Sachs (GS), and Charles Schwab Corp. (SCHW). So far, earnings season for the financials has been a mixed bag, with weak reports from JPM and MS on Thursday followed by better results from C and WFC on Friday.

 

 

It is tough to find clean, percolating set-ups in this environment as most tend to materialize in real-time instead of taking a little time to ripen. Two possibilities on the short side that popped up late in the week are MasterCard (MA) and Visa (V) which pushed past moving average resistance lower in their patterns on Thursday and then gapped higher on Friday.

The moves on Friday took them both right into higher potential moving average resistance on their charts. MA ran into and stalled at its 50-day moving average while V revisited the underside of its 200-day moving average and stalled at the line. Both may play out as possible short entries here using the respective moving averages, e.g., the 50-day for MA and the 200-day for V, as covering guides.

 

 

I wrote over a week ago that I would prefer to see semiconductors push up higher in their patterns before looking to be aggressive on the short side, and the group did rally all week long. Sticking with the eight names I showed in my last report, we can see how this is working out.

Analog Devices (ADI), Advanced Micro Devices (AMD), Broadcom (AVGO), Lam Research (LRCX), Microchip Technology (MCHP), Micron Technology (MU), Nvidia (NVDA), Qualcomm (QCOM), and Texas Instruments (TXN) have all pushed higher over the past few days, but I do not see anything in the here and now that puts them in table-pounding buy positions.

 

 

Qualcomm (QCOM) has put in the strongest showing, gaining momentum off the lows in late June after an analyst projected that Apple (AAPL) would continue to use QCOM chips in their iPhones. That move carried up to the 50-dma, but the stock stalled at the line to play out as a nice short whereupon it headed back to the lows two weeks ago.

On Thursday I blogged that the stock posted a pocket pivot at the 50-day line after a Goldman Sachs (GS) analyst reiterated an overweight rating on the stock while simultaneously lowering his price target to $180 from $205. That was good enough for a sharp rally that carried through into Friday and now QCOM is approaching some important potential double-top highs in the pattern and the 200-day line. Where this goes from here may depend on what earnings look like when the company is expected to report on July 27th.

 

 

The daily chart of the VanEck Semiconductor ETF (SMH) gives a good perspective of the macro view of the semiconductor space. Remember that the SMH peaked at 318.69 in the first week of January 2022 and declined over 40% before bottoming at 189.94 two weeks ago.

I would not be surprised to see this test the 50-day line given how oversold it has become, but it also has a double-top peak at 218.81 from three weeks ago to contend with. How this plays out will certainly depend on the general market context as we push through earnings season and a parade of semiconductor companies start to report earnings.

As I have noted in recent reports, the group tends to correlate strongly, and so earnings from one member of the group can influence sympathy moves in other semis. Therefore, it may be feasible to take the group approach using either the Direxion Daily Semiconductor Bull 3X ETF (SOXL) or the Direxion Daily Semiconductor Bear3X ETF (SOXL) to play post-earnings moves one way or the other.

 

 

Cyber-security names worked out well as short-sale targets early in the week per my comments in the Monday video report. CrowdStrike (CRWD), CyberArk Software (CYBR), Fortinet (FTNT), and Palo Alto Networks (PANW) are now in less-defined positions on their charts with earnings coming up for all four in the first week of August.

Note that despite options expiration on Friday, volume was light as all four rallied. The moves in any of these may offer short-sale entries as they push up into potential moving average resistance which for CYBR, FTNT, and PANW would be the 200-day moving averages.

 

 

Ponzi-Stocks Affirm Holdings (AFRM), Bill.com (BILL), Roku (ROKU), and SnowFlake (SNOW) have also mostly worked out as decent short-sale targets from earlier in the week. Now we are looking at possible short-sale entries along moving average resistance.

However, it is not clear whether these will play out to the downside in short order or attempt to rally back up to their prior highs in the jagged fashion they have demonstrated since the lows of mid-June.

 

 

Some, like Affirm Holdings (AFRM), can also be viewed with a more bullish perspective if one does not fixate on potential resistance at the 50-day line. Here we can see that the stock posted a pocket pivot at its 10-dma and 20-dema on Thursday before edging back above the 50-dma on Friday.

This gives the pattern over the past three weeks the look of a little cup-with-handle formation. AFRM also is not expected to post earnings until September, so in a rising general market context this could move higher. I would certainly not be inclined to short the stock unless it quickly busted the 50-day line followed by the confluence of the 10-dma and 20-dema, so maintain a sensible 360-degree approach with these names.

 

 

When it comes to these Ponzi-Stocks, it is important to be aware of short interest given that most of these names have lost 80-90% of their value since last year. Such breakdowns embolden shorts, and when short interest reaches high levels, as it has with Beyond Meat (BYND) a short squeeze as natural sellers are wrung out of the stock is always a possibility.

BYND did not post any compelling long entry signals as it lifted through its 10-dma and 20-dema two weeks ago, but I did notice the voodoo pullback to the 10-day line on Thursday. BYND also had about 43% of its float sold short at the end of June, so it is clear that this move is a short-squeeze that was helped along on Friday by news that they are coming out with a steak product.

I can hardly wait! In any case, while I saw the voodoo pullback to the 10-day line on Thursday, I was more on the lookout for a breach of the line following a double-top style failure on Monday. In hindsight I should have taken the shot with the idea of flipping short IF the stock broke below the 10-dma. There was no reason to fear taking a flexible 360-degree approach based on the bald-faced technicals.

 

 

When a beaten-down name like Revlon (REV) has 73% short interest and another company comes along and muses about buying them, you get moves like this. The company is a money-losing nightmare, estimated to lose $4.09 a share this year and $4.17 next year. Certainly, there is no way in Hades that one would have wanted to be long as it broke to a low of 1.08 in mid-June.

Running through my Voodoo screens overlayed on higher short interest names this weekend I came across REV as it pulls into the 20-dema with volume drying up to -89.9% below average. If this has any upside to it at all, then this might be the spot to hit it, but there is the risk of no buyout occurring as well as the question of just how much a company losing $4 a year is really worth without some sort of delusional innovation spin.

 

 

If we do get a bear market rally, then do not sit there beating your head against a wall trying to short everything in Ponzi Land that lost 80-90% of its value and is now bouncing. I generally do not like to buy initial V-shaped moves off intermediate-term lows, preferring instead to sit back and watch how things develop.

Roblox (RBLX) is a good example as it tries to hang along its 10-dma and 20-dema after finally posting a bona fide pocket pivot two weeks ago at the 10-day line. It worked out nicely as a short two Fridays ago but notice that sellers are not piling on as it comes back into the 10-dma and 20-dema. This may turn out to be a buyable area of support on pullbacks so should be watched closely.

Of course, if 20-dema support fails to hold then RBLX may return to the Land of Short Sale Targets. In any case, as I pointed out in my Thursday blog post, the basic exercise of forcing yourself to look for bullish action rather than taking the confirmation-bias route in perma-bear fashion can help keep your head clear in this regard.

 

 

In Crypto Land, where most everything is just a Ponzi-Stock in drag, we can investigate something like Coinbase (COIN), a crypto-broker expected to lose $7.76 a share this year and $3.77 next year. It posted a pocket pivot two Fridays ago but has gone nowhere as that played out more as a near-term double-top short-sale set-up.

COIN is now drifting along the underside of its 10-dma and 20-dema so looks more like a short within a bear flag using the two moving averages as selling guides. As of the end of June, short interest was at about 32 million shares against a float of 83.4 million shares, or 38.3% of the float.

If it does not work as a short here and clears the 10-dma/20-dema confluence, then perhaps it finally follows through on the pocket pivot of two Fridays ago. It may also be that this current bear flag does not resolve itself until COIN reports earnings in the second week of August, and my guess is that the report will not be pretty given recent developments in Crypto Land.

 

 

Given the rally on Friday I would have expected big-stock NASDAQ names Apple (AAPL), Amazon.com (AMZN), Alphabet (GOOG) and Microsoft (MSFT) to act more robustly on a group basis. Only AAPL remains in a solid uptrend off the mid-June lows as it seems to garner favor as a defensive tech name. We will certainly find out whether that view is warranted when they report earnings next week.

Meanwhile, AMZN cleared its 50-day on Friday but is looking like a double-top situation. GOOG and MSFT simply played out as short-sale entries at moving average resistance at their 10-day, 20-day and 50-day lines and closed in the lower halves of their respective price ranges.

 

 

These four stocks above are all set to report next week, but this coming week the big-stock NASDAQ earnings parade kicks off with Netflix (NFLX), which is expected to report Tuesday after the close, and Tesla (TSLA), which is expected to report Wednesday after the close. The two formerly high-flying but now busted NASDAQ leaders posted opposite signals at their 50-dmas on Friday.

NFLX posted a pocket pivot at the 50-day line ahead of Tuesday’s report while TSLA stalled at 50-day moving average resistance where it was shortable using the 50-dma as a covering guide. Not that I’m inclined to do anything with either stock until earnings are out, however, but we can monitor these names after earnings are out for possible high-velocity, high time-value price moves that may materialize at that time.

 

 

Oil prices continue to crater, as we see on the daily chart of crude oil’s proxy, the United States Oil Fund (USO) ETF. It has now undercut what I see as the three primary lows in its prior base from which it broke out and then failed as a late-stage, failed-base, short-sale set-up. On Thursday it pulled a U&R through the first two lows and then stalled on the way up toward the 10-dma on Friday.

Outside of a natural reaction move that could perhaps carry up further to the 10-day, 20-day, or 50-day moving averages, oil is dead in the water. Consider just how juiced up everyone was about $175 a barrel oil prices when it was breaking out in early June. A prime lesson in taking whatever the crowd seems to know for sure with a massive grain, or rather boulder, of salt.

 

 

As the oil patch has broken down, so have the coal miners. The stocks in the group will all start reporting names next week as we approach the end of July into early August. The question is whether coal will go the way of oil, and for the most part we have seen names in this group break down in late-stage, failed-base (LSFB) set-ups.

Two that have been acting much better and are near prior highs are Alliance Resource Partners (ARLP) and CONSOL Energy (CEIX). Both of these have the look of cup formations, or double-tops if one wishes to take a bearish view. ALRP closed Friday at 20.85, just below the 21.24 left-side peak of June 7th. CEIX closed at 57.02, above the 56.79 high of June 28th and below the 59.38 high of June 7th so has two reference highs where a double-top might materialize.

That presumes of course, that these patterns resolve bearishly, and it is possible that nothing happens until they report earnings. To that end, ARLP is expected to report on August 1st and CEIX on august 4th. Thus, I am not inclined to do anything here until earnings are out.

 

 

In the absence of a large number of “juicy” set-ups long or short and a well-defined market trend, the current environment can seem a bit muddled, particularly on an intraday basis. There are only so many creative tricks that one can keep up their sleeve at any given time. The solution is found in focusing on earnings season and the potential high-velocity, high time-value moves that can occur in a stock after it reports earnings.

As we move into the heart of earnings season, this will be my primary focus. Earnings season may also add some clarity to the current market trend, and possibly lead to a more decisive resolution to the current bear flags we see in the index charts, whether bullish or bearish. For now, we can hang our hats on those possibilities as we allow the market to sort itself out.

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 unique requirements for a U&R other than the price action. It is like Wyckoff’s Spring. A MAU&R, or a moving average undercut & rally, is simply 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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