The Gilmo Report

July 7, 2021

July 7, 2021 6:56 pm ET

There isn’t much that is new about this market. I tend to think that it is in dire need of some fresh themes, but the current bifurcation remains in force. Tech/growth names, particularly of the larger-cap variety, continue to rally while stuff stocks, consisting primarily of cyclicals, materials, and industrials remain weak. This has resulted in swing-trading opportunities on both sides of the market, long and short, but little in the way of sustainable trends.

If we forget about the S&P 500 and the NASDAQ Composite for a day and look at two broader indexes, the NYSE Composite and the small-cap Russell 2000 as represented by its proxy, the iShares Russell 2000 ETF (IWM)), we get a better sense of what this market is doing under the surface. The current bifurcation, where individual stocks and groups essentially split the difference each day with certain areas of the market rising while others languish, we see that both of these indexes remain within choppy consolidations extending back to at least mid-March.

 

 

So, while the NASDAQ and the S&P have been continuously edging to new highs on a daily basis, most of the rest of the market is tracking time, at best, and moving lower, at worst. The release of the Fed meeting minutes, indicating that the Fed is likely to begin tapering sooner than later, did not turn the lights out on the party. Despite all-time highs for the NASDAQ Composite, S&P 500, and NASDAQ 100 Indexes today, breadth was slightly negative on the NYSE and slightly less than two-to-one negative on the NASDAQ. In the end, it all led to a wide-ranging churning day on even volume.

 

 

The Sprott Physical Gold Trust (PHYS) and the Sprott Physical Silver Trust (PSLV) continue to hold above recent U&R lows. PHYS is still well above its 13.93 U&R low while PSLV is a little over 1% above its own 9.15 U&R low. Those both remain selling guides for each if one is still playing these from the original undercut & rally long entry points at those same lows. So far, however, these moves look tentative, so keep a quick trigger finger if they break support.

 

 

To anybody paying attention, it is obvious that new highs in the NASDAQ Composite and the NASDAQ 100 Indexes, and to a lesser extent the S&P 500, have been aided considerably by the upsurge in the biggest of the big-stock techs. Yes, I’m talking about the S&P Five, although they could also be referred to as the NASDAQ Five since together they account for about a 43% weighting in the NASDAQ 100 weighting.

Apple (AAPL), Amazon.com (AMZN), Facebook (FB), Alphabet (GOOG), and Microsoft (MSFT) are all mostly extended, but I can’t say that I’ve been hot to buy these stocks since I can find better, higher-velocity set-ups in smaller names, both long and short. Nevertheless, they have been moving higher, and in the case of AAPL and MSFT, on lighter volume until this week and after their rallies became extended.

 

 

When pondering the list of 12 cloud stock names that I’ve shown in spreadsheet format in recent reports (reference the weekend report for the full list), the key thing to remember is that these are a big part of the current market leaders, so to speak. I tend to think that if they break down they will likely have to do so within the context of a general market pullback, which so far is not completely evident. However, given the divergences underneath the hood of the market, it is a possibility we should be prepared for as intrepid short-sellers.

The type of action we’re looking for is best illustrated by Nutanix (NTNX), which has been on fire since mid-May. It followed the 10-day line straight up to 52-week highs and then finally broke below the line last Wednesday. Since then, it has been living below the 10-day line, which served as shortable resistance before it peeled away from the underside of the 10-dma and made a break for the 20-dema.

It remains a short on weak rallies into the 10-dma. Meanwhile, we can watch for any break below the 20-dema as a second short-sale trigger point, should it occur. There is no guarantee as to how this will play out. Given the extent of the prior run-up, the 20-dema could also serve as support for a new base-building process. Look for context, and look for confirmation, if you intend to stalk this on the short side.

 

 

MongoDB (MDB) is a similar example. It gapped through the 10-day line last week on news of a secondary stock offering but held support at the 20-dema. That led to a rally up into the 10-day line yesterday and then up near the line again today. Both moves were shortable, and MDB is now back at the 20-dema. Further weak rallies back up into the 10-day line could offer additional short-sale entry opportunities from here, but a breach of the 20-dema would trigger a secondary short-sale entry if it occurred, as well.

 

 

In some of the weaker names that have not rallied nearly as far up the right sides of their charts, like Coupa Software (COUP), for example, other types of references can be used. In this case, note that the stock ran into and reversed at prior price resistance along the April highs just below $280. Thus, one could short this move here using the high of the day as a covering guide.

Meanwhile, the 200-day moving average looms just above, and this could serve as a secondary resistance level. That assumes, of course, that COUP can push past the 280 price area, and that would likely depend on the general market’s action from here. Play it as it lies.

 

 

Also remember to maintain some respect for strong names that show little concrete evidence of failure, at least not right here, right now. I wrote a week or so ago that despite being as extended as they were at the time, and despite being absurdly high-PE situations, they could easily set up again and move higher. This is precisely what we’ve seen in CrowdStrike (CRWD), DocuSign (DOCU), and ZScaler (ZS), all three of which posted continuation pocket pivots yesterday at the 10-day moving averages.

Of course, CRWD and ZS did have some assistance from news over the weekend of another big hacking job in the cybersphere. For now, however, we simply cannot force the issue here – if there is no concrete evidence of failure, then it is best to stay out of the path of a steamroller. In some cases, if you are able to, just take the opposite approach and hop on the steamroller for the upside ride.

 

 

Semiconductors have mostly provided fertile ground for the short side of this market, representing a major tech sector that is not participating in the major indexes’ all-time highs parade. Micron Technology (MU) was all-too cooperative today as it opened up and ran right into its 50-day moving average where it was imminently shortable this morning. It then broke to lower lows on heavy selling volume.

 

 

Advanced Micro Devices (AMD) has finally run into double-top price resistance, but the rally from the 50-dma, which was quite playable as discussed in previous reports, was more than decent for the swing-trading longs. This type of double-top set-up is tricky to enter, and one had to have been stalking this into the rally to be alert to the early-morning breakdown at the open.

Now, with earnings expected on July 27th, AMD is testing near-term support at the 10-day line as selling volume picked up sharply today. We’ll now get to see how well it can hold the 10-day line on this pullback, but it’s likely that it simply bounces around just above the 10-day line ahead of earnings. Otherwise, a break below the line would trigger another short-sale entry if it occurred.

 

 

Semiconductor equipment makers have all been shorts this week, with Brooks Automation (BRKS) remaining the weakest of the bunch as it breaks to lower lows. It is now dropping just below the 89.56 low of June 21st, so for me this would be a near-term cover point. BRKS is expected to report earnings on July 29th.

Applied Materials (AMAT), KLAC Corp. (KLAC) and Lam Research (LRCX) all triggered short-sale entries at the confluence of their respective 10-day and 20-day moving averages yesterday and today. AMAT closed right above its 50-dma, so a break below the line could trigger a secondary short entry if it occurred. Meanwhile, KLAC and LRCX both closed below their 50-day lines so that rallies back up into the 50-dma in either might offer potential short-sale entries from here.

 

 

Western Digital (WDC) is back below the lowest of its moving averages, the 10-day line, where it ran into intraday resistance today. While one could attempt to short the stock here and use the 10-dma as a covering guide, for my money the most optimal entries would be on rallies up further to the 20-dema or the 50-dma. Play it as you like but maintain risk-management discipline!

 

 

I’m still watching smaller semiconductor manufacturer Himax (HIMX) which failed badly on a breakout attempt last week, despite the high-volume move. It is now retesting its 20-dema as volume declined to -35.3% below average today. Perhaps it bounces off the line and attempts a re-breakout. If one believes that will be the case, then it can be bought here while using the 20-dema as a tight selling guide.

If it busts the 20-dema, however, it will then confirm a potential later-stage, failed-base, short-sale set-up and a secondary, short-sale entry trigger at the line. Keep an eye on its bigger semiconductor equipment cousins, as it will likely tend to correlate to their price movement.

 

 

We can see another semiconductor equipment maker, Kulicke & Soffa Industries (KLIC), paving the way for HIMX with a big-volume breakout failure of its own. However, this one failed to hold the 20-dema and triggered a short-sale entry at the line yesterday. It then offered another short-sale entry near the line this morning before heading south and busting the 50-day line, just for good measure, and triggering a second short-sale entry in the process.

 

 

Industrial metals Alcoa (AA) and Cleveland Cliffs (CLF). Freeport McMoRan (FCX) and U.S. Steel (X) remain a mess. AA was an easy short-sale yesterday when it breached the 50-day line, while nimble short-sellers could have hit X on the short side today at the 20-dema. Remember that AA is expected to report earnings next week, on July 15th, so there may not be much to do with the stock at this point until after earnings.

CLF and FCX are expected to report on July 22nd, and X on July 29th. Given the downside extension in these names, they may simply flounder about here with little movement one way or the other until earnings are out.

 

 

Nimble short-sellers could have also picked on fertilizers yesterday as well. CF Industries (CF) and Nutrien (NTR) both could have been shorted at their 20-demas yesterday, and from there they broke lower and are now testing prior lows. Mosaic (MOS) is also hanging around prior lows, and overall, this group looks mostly spent on the downside.

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.

 

 

Virgin Galactic (SPCE) has remained a relatively high-velocity name as it orbits around its 10-dma following last week’s double-top/punchbowl entries on the short side near the all-time highs around $60. While it has dipped below the 10-dma a few times, it has yet to decisively bust the 20-dema, which is typically the confirming break that you’re looking for in a Punchbowl of Death or POD set-up.

This remains a dynamic situation, and with the upcoming test-flight schedule for this Sunday, July 11th, with founder Richard Branson onboard, may have some impact on where SPCE goes from here. If the flight is successful, it could trigger a rally that might then be utilized as a possible opportunistic short-sale entry, or, conversely, a buyable gap-up, or even a BGU followed by a shortable reversal. Until then, the stock is likely to hold support along the 20-dema, so I tend to favor waiting to see what emerges after this weekend’s test flight at this point.

 

 

I’ve noted in recent reports that the recent resurgence of FOMO names off their mid-May lows was likely over, and in fact some of these names have turned into very reasonable short-sale set-ups, many of which were discussed in detail in my weekend video report. We’ve already seen how Workhorse (WKHS) and Yalla Group (YALA) have come apart recently, and this week we’ve seen several other sub-groups within the general FOMO space start to give it up.

One area that has been of interest to me has been the electric vehicle battery/power names, which have triggered short-sale entries over the past few days. Ballard Power (BLDP), Blink Charging Company (BLNK), and Plug Power (PLUG) all triggered short-sale entries at their 20-demas over the past couple of days, with BLDP and BLNK also busting their 50-day lines where they triggered secondary short-sale entries today.

FuelCell Energy (FCEL) was already in a funk after living below all of its moving averages, at least the ones that I follow, before breaking lower again today. The last possible short-sale entry occurred at the 20-dema six days ago on the chart. These names were all discussed as FOMO names to watch for shortable breakdowns in my weekend GVR, and there they go.

 

 

In concert with the breakdown in EV Battery/Charging names, we also see the hot Chinese electric vehicle names start to break near-term support at their 10-day and 20-day moving averages. Li Auto (LI), NIO (NIO), Niu Technologies (NIU), and Xpeng (XPEV) all busted their 10-day lines today, triggering aggressive short-sale entries for intrepid short-sellers.

Note that NIU, as a simple maker of “smart” e-scooters, was already in a shortable position at its 50-dma last week, as noted in my video reports. The other three, all EV auto-makers, are in various states of early breakdowns along their 10-day and 20-day lines. Mostly I’d be watching how these act around their 20-demas in conjunction with the five-minute 620-charts to determine possible short-sale points.

Technically, NIO and XPEV, which closed just below their 20-demas, could be viewed as short-sale entries right here while using the 20-demas as covering guides. However, I would also be alert to any rallies back up through the 20-day lines that then run into potential resistance at the 10-day moving averages. Play them as they lie.

 

 

Beyond Meat (BYND) was looking good last week, at least to those who don’t know better, when it broke out of a month-long price range on above-average volume. That was, however, another one of these breakouts to nowhere. The stock quickly failed yesterday when it broke below the breakout point and the 10-day moving average before closing below the 20-dema and holding support at the 200-day moving average.

This morning BYND briefly rallied into the 20-dema and turned tail, giving short-sellers two entry triggers at the 20-dema and then the 200-dma as it broke lower. Now I’m watching for weak rallies back up into the 200-day line as potential lower-risk short-sale entries from here. This was discussed in my weekend video report focusing on my FOMO list of stocks and provides a fascinating example of how breakouts can often be monitored as potential short-sale set-ups once they fail.

 

 

Roblox (RBLX) continues to reverse back below the 20-dema every time it tries to poke its head back above the line, so for now I view the stock as shortable as close to the 20-dema as possible. The 20-day line then becomes your covering guide with the idea of looking for a break below the 50-day line in relatively short order as confirmation of a final breakout failure.

Note that RBLX continues to hold above the prior breakout of late May, which coincides roughly with the 50-day line. Thus, a breach of the 50-day line would offer firmer confirmation of a potential second leg down from here and a complete LSFB type of base failure.

 

 

Upstart (UPST) remains in a bear flag since failing on a recent breakout to nowhere. So far the 20-dema has served as solid resistance on the upside, and the stock is now below the 50-dma as well. In this position I view rallies up into the 50-day line as lower-risk, short-sale entries from here.

 

 

With breadth as weak as it is, it isn’t hard to find short-sale candidates in an environment where the major market indexes are making new highs on a daily basis. This is the current paradox, but it’s not as if it can’t be dealt with by remaining objective on a set-up by set-up basis. If a stock sets up as a short, you short it. If it sets up as a long, you go long. Meanwhile, where the indexes go seems to be less important these days, unless you’re riding the biggest of the big-stock index names.

Our approach therefore remains the same. Just follow the set-ups, with the idea that if the market does begin to move more broadly in one direction or the other, the set-ups will lead you along with it. Otherwise, I am looking forward to the commencement of my favorite time of the year, earnings season, which begins in earnest next week with AA’s report. As long-time members know, earnings season can produce some very actionable set-ups with high-velocity, high time-value potential, so this will provide another angle to play in this odd market environment.

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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