The Gilmo Report

July 18, 2021

July 17, 2021 11:10 pm ET

The market ended the week on a very sour note as scores of individual stocks and groups were slammed with selling across the board. The action on the daily charts of the NASDAQ Composite and S&P 500 looks quite benign against the broad selling seen among individual stocks on Friday. The NASDAQ busted its 20-dema on lighter volume while the S&P rolled below the 10-day line on higher volume while it held support at the 20-dema.

 

 

The broader NYSE Composite Index perhaps does a more appropriate job of depicting what the broad market is going through currently as it slashed below its 50-day moving average on higher volume to end the week. Of course, the major market index action is a secondary indicator, at best, in this market where breadth has remained quite putrid, and the action of individual stocks and groups does a much better job of telling the complete story.

 

 

The indefatigable S&P Five, Apple (AAPL), Amazon.com (AMZN), Facebook (FB), Alphabet (GOOG), and Microsoft (MSFT), have started to show some cracks in the armor as AMZN and FB both broke below their 10-day lines on Thursday. AMZN continued lower on Friday before meeting up with its 20-dema, while FB triggered an aggressive short-sale entry on Friday at the 20-dema. If AMZN breaks below its 20-dema, then its recent breakout would certainly be in jeopardy of failing outright.

As I noted in Wednesday’s report, a breakdown in these names would represent, to some extent, the other shoe falling in this market, but as we can see, the action is just barely starting to tip in that direction, and it is still premature to draw any firm conclusions. Nevertheless, while this narrow group of leaders has done most of the heavy lifting in driving new index highs, it is clear that a general market rip-tide is dragging most stocks and groups out to sea below the surface.

 

 

Another area of leadership has been the cloud/software space, as I’ve noted repeatedly in recent reports. This also represents another area of the market that I am watching closely for price action that would indicate the dropping of another proverbial shoe. Most of these names have managed to hold up well, but more recently we’ve seen some initial signs of breakdowns off the peaks, or worse in some cases.

In the group chart below, we can see how a breakdown in Avalara (AVLR) over the past week or so has gathered momentum all week long before the stock busted the 200-day moving average on Friday. AVLR triggered short-sale entries all week long, starting at the 10-dma on Monday, the 20-dema on Thursday, and the 200-day moving average on Friday. Only the 50-day line looms just below, and AVRL appears set for a test of this area of support next.

CrowdStrike (CRWD) has closed two days below the 20-dema, so can be viewed as being in an aggressive short-sale entry position using the 20-day line as a tight covering guide. DataDog (DDOG) is sitting right on top of its 20-dema, so can be watched for any break below the line that would trigger a short-sale entry at that point if it occurred.

DocuSign (DOCU) briefly dipped below its 20-dema on Thursday, but confounded short-sellers by quickly shaking out and regaining the line on a pocket-pivot volume signature, thus posting a supporting pocket pivot at the 20-day line. A low-volume rally on Friday took it right up into the 10-day moving average where we can watch for some sort of resolution that might trigger the stock as a short-sale entry again.

 

 

In the second group chart, we can see that Bill.com (BILL) triggered a short-sale entry at the 20-dema on Thursday and then closed just below the line on light volume Friday. That would keep it in a short-sale position using the 20-dema as a right covering guide.

The exact same type of set-up exists in CloudFlare (NET) and Twilio (TWLO) as well, with both stocks dropping below their 20-dema on Thursday and then closing just below the line on Friday. That likewise puts them in short-sale positions just below the 20-dema which then serves as a tight covering guide.

Atlassian (TEAM) is a slight variation on the overall theme, but it closed the week just above its 20-dema. Note that the stock has run into consistent intraday resistance along its 10-day moving average over the past four trading days. Therefore, we can consider any rallies up into the 10-day line as potential short-sale entries while a break below the 20-dema would trigger a short-sale entry at that moving average if it occurred. Play it as it lies.

 

 

The weaker cloud names among those I’ve discussed in recent reports continued to break down right into the end of the week, in some cases with disastrous downside. Nutanix (NTNX) which triggered as a short at its 10-dma on Monday and then its 20-dema on Thursday ended the week all the way down below its 50-day moving average.

 

 

Coupa Software (COUP) was a beautiful thing for the shorts all week long as it started the week off with a short-sale entry at the 10-dma. This came on the heels of last week’s initial short-sale entry on the reversal along price resistance at the late April highs.  Short-sale entries were then triggered along the 20-dema on Wednesday and Thursday, with Thursday’s price break slashing right through the 50-dma before the stock finally ended the rout near its May and June lows.

In my Wednesday report, I talked about using the 50-day line as an initial profit objective and cover point. But the stock slashed through the line on Thursday after making a presentation to analysts. Apparently, the analysts weren’t impressed, and the stock split wide open. If one were taking into consideration the news catalyst for Thursday’s break, then one could have sat tight or even used the breach of the 50-day line as a fresh short-sale trigger.

 

 

MongoDB (MDB) was last shortable along the 10-dma on Monday, Tuesday, and Wednesday before it broke lower on Thursday. The stock continued to drift lower on Friday as it now approaches the 50-dma on very light volume. From here, watch for weak rallies back up into the 10-day moving average as possible short-sale opportunities with an overall downtrend.

 

 

Roblox (RBLX) was a nice short-sale entry at the 50-day moving average on Wednesday and then undercut the prior 78.56 low of mid-June. The stock attempted an undercut & rally (U&R) move back up through that low on Friday but fell short, closing the week out at 77.56 and just below the prior 78.56 U&R entry.

From here, the stock could still attempt a more robust U&R move which can be watched for. However, I would tend to view this as a potentially shortable rally once it gets closer to the 50-day moving average. Either that or the rapidly declining 10-dma and 20-dema which are now both below the 50-day line.

 

 

Upstart (UPST) is attempting its own U&R through the recent July 8th low at 110.82. It closed Friday at 113.79, so the U&R is in play, for now. Volume dried up sharply on Friday, so I want to watch for any further low-volume rallying that potentially takes the stock up into the 10-dma or 20-dema, or even the 50-dma, where a lower-risk, short-sale entry into the rally might be found.

 

 

Financials continue to break down as interest rates have fallen, but the selling pressure seems to indicate that something worse might be afoot here. In any case, this is one major group that has been and continues to break down.

 

 

Industrials were carpet-bombed on Friday as well. Many have been in downtrends for some time now, and in most cases those downtrends worsened on Friday.

 

 

Industrial metals are in melt-down mode, even after Alcoa (AA) beat earnings estimates by a healthy 18 cents on Thursday afternoon while maintaining guidance for a strong 2021. That wasn’t good enough for the market, and down it went, along with the rest of the industrial metals names. Both Cleveland-Cliffs (CLF) and Steel Dynamics (STLD) offered short-sellers entry triggers at their 50-day moving averages on Friday.

 

 

If we look at Cleveland-Cliffs (CLF) a bit more closely, we can see that it has now triggered as a late-stage, failed-base, short-sale set-up in progress. Once it busted the 20-dema on Friday, the short was on and the stock then plummeted right through its 50-day line where it triggered a second short-sale entry. At this point, weak rallies back up into the 50-dma would offer potential short-sale entries from here, but you have to be on top of this on Friday for the most optimal entries.

 

 

Fertilizers were pulverized, extending downtrends that were already in place over the past few weeks. On the group chart below, we can see that Intrepid Potash (IPI) triggered a short-sale entry at its 20-dema on Friday, while Nutrien (NTR) triggered a short-sale entry at its 50-dma on the same day. The other two, CF Industries (CF) and Mosaic (MOS), simply made lower lows but were shortable along their 10-day and 20-day lines earlier in the week.

 

 

The deterioration in fertilizers as a sub-group of the agricultural sector is evident among other names in the sector as well.

 

 

Homebuilders don’t seem to be gaining any traction from the decline in interest rates, and the action in this sector may have implications for where the economy is headed.

 

 

As stuff stocks, lithium-related names came under severe selling pressure as the week wore on with lower lows logged right into Friday’s close in most cases. In the group chart below, Albemarle (ALB) remains the leader as it pulls into its 10-day line, but the other three have triggered a number of short-sale entries over the past three days.

Lithium Americas (LAC) triggered short-sale entries on Thursday at its 10-dma, 20-dema, 200-dma and finally 50-dma before triggering another entry at the underbelly of the 50-day line on Friday. It then broke lower and is now testing prior lows down around $13. Livent Corp. (LTHM) was looking quite strong on Monday, like LAC, but that strength was little more than the typical one-day wonder trade on the long side.

LTHM spent the rest of the week heading south and on Friday triggered short-sale entries in succession at its 10-dma, 20-dema, and finally 50-dma as it looks set for a test of the 200-day moving average. Piedmont Lithium (PLL) meanwhile triggered a short-sale entry at its 50-dma on Friday and is now undercutting its prior June and July lows in the $65-66 price zone.

LAC, LTHM, and PLL can all now be watched for weak rallies back up into their 50-day moving averages which could serve as potential short-sale entries from here. These also serve as fantastic examples of the regularity with which strong-volume upside moves, powerful price moves, if you will, on their face, fizzle out immediately.

 

 

And while Albemarle (ALB) may be the strongest and most constructive of the lithium names, its chart position is also suspect. When we look at the bigger picture on a longer-term daily chart, below, we see a double-top breakout attempt on Monday that is now failing. With ALB heading for the 10-dma, we can watch for any break below the line as a possible short-sale entry trigger from here. That is, of course, if you didn’t get short at double-top resistance around the $190 level earlier in the week! 😊

 

 

Oils were all drilled to lower lows this week, as the representative group chart below shows. Study the charts carefully and you will see that all six of these names triggered short-sale entries at various moving averages as early as Wednesday. Friday’s selling sent them all plummeting lower to lower lows, another group swept away by the tidal destruction.

 

 

Semiconductors were also slammed on Friday, but for the most part we’ve been campaigning several of these on the short side for a while now. Applied Materials (AMAT) led the semiconductor equipment names lower on Friday by triggering a short-sale entry at its 50-day moving average. Intel (INTC) reversed at the confluence of its 10-dma, 20-dema, and 50-dma on Friday and then busted the 200-dma for good measure.

Microchip Technology (MCHP) triggered yet another short-sale entry at its 200-dma on Thursday and then continued lower again on Friday. Micron Technology (MU) gave shorts a great entry on Wednesday at the 50-day line and then triggered another short-sale entry on Friday when it busted the 200-day moving average.

The big leader in the group, Nvidia (NVDA), finally triggered an aggressive short-sale entry at the 10-day line on Wednesday that was quickly followed by another aggressive short-sale entry at the 20-dema on Thursday. It now looks set for a test of its 50-dma.

 

 

As AMAT finally busted its 50-day line with authority on Friday, other semiconductor equipment stocks were flattened even further. If you were monitoring any of these names, all of which have been discussed at length in recent reports, you would have seen short-sale triggers in all four shown below, Himax Technologies (HIMX), Lam Research (LRCX), Kulicke & Soffa (KLIC) and KLA-Corp. (KLAC) on Thursday or Friday, or both.

HIMX triggered a short-sale entry at its 20-dema on Thursday and is now playing out as a late-stage, failed-base, short-sale set-up where rallies into the 20-dema would offer short-sale entries from here. KLAC was shortable along its 10-day line on Thursday and Friday before splitting wide open on Friday.

Meanwhile, KLIC flipped out at its 50-day line on Friday where it triggered a short-sale entry. LRCX was shortable along its 10-day and 20-day lines on Thursday and again on Friday before it, too, split wide open and ended the week with a sharp downside break.

 

 

Precious metals were not spared on Friday either, with both the Sprott Physical Gold Trust (PHYS) and the Sprott Physical Silver Trust (PSLV) rolling over to the downside. The PHYS held support at its 10-dma, but the PSLV broke below its 200-day moving average and the prior 9.15 undercut & rally (U&R) buy point which was your selling guide.

As I wrote on Wednesday, I was not that keen on owning these since I felt that if one were long these at all, one had to, “…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.”

 

 

And, of course, precious metals miners and related stocks have continued to break lower. Agnico Eagle Mines (AEM), First Majestic Silver (AG), and MAG Silver (MAG) were all shorts at logical resistance per my comments on Wednesday, and all three have rolled lower. Even Kirkland Lakes Gold (KL), which was acting well at the start of the week, played out as I indicated it could when I wrote on Wednesday that the sharp move off the lows could simply bring it into shortable resistance.

That turned out to be the case on Friday as KL reversed back below its 50-day line, triggering a short-sale entry at that point. Weak rallies back up into the 50-day line from here would potentially offer additional short-sale entries with the idea of using the 50-dma as your covering guide.

 

 

The carnage in this market is broad and deep, even with the S&P and NASDAQ Composite down only -1.5% and -2.5% off their recent highs, respectively. This has provided a target-rich environment on the short side, the short of the week being Virgin Galactic (SPCE). Monday’s news gap-up after a successful test flight on Sunday with the ever effervescent Sir Richard Branson on board simply became the Mother of All Short-Sale Opportunities.

Although an intrepid short-seller with a good borrow in hand Monday morning during the pre-open trading session could have hit the stock short around $55 a share, even if we measure from Monday’s high at 50.75 the five-day break was a brutal -60%. Not bad work if you can get it!

 

 

You can put the weekly chart of SPCE in your files as one of the best examples of a “martini-glass” type of Punchbowl of Death (POD) short-sale set-up and formation we’ve ever seen. Thirteen weeks straight down followed by a six-week rocket ride right back up to the old highs was a classic POD recipe that went by the book once all the news hype dissipated on Monday. Don’t be surprised if this eventually heads all the way back to where it started around $14-15 in mid-May.

 

 

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.

 

 

I wrote on Wednesday that, “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.” That prominence grew over the final two trading days of the week. The bottom line at this stage is that the optimal short entries in most target stocks occurred earlier in the week. Meanwhile, we can observe if and how the other shoe starts to drop among big-stock techs and cloud/software leaders.

This may be where the next wave of short-sale targets starts to appear, and in fact we’ve seen a number of clouds break down sharply this past week, such as COUP and NTNX, for example. Some of this is therefore already in motion. And as we progress through earnings season, which picks up this week with big-stock names like Netflix (NFLX) scheduled to report mid-week, we can continue to look for opportunities to crop up after earnings are reported, such as was the case with AA on Thursday and Friday.

What has been something of a bifurcated market has, based on my objective observations, started to lean more toward the short side, and the hard evidence is there to see. In general, the action under the surface of the market, some of which is now showing up as very visible ripples on the surface, is turning bearish. We only need follow the set-ups in real-time to keep pace with any potential, deeper correction to come. 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

 

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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