The Gilmo Report

June 13, 2021

June 12, 2021 10:34 pm ET

CPI inflation came in at a 13-year annualized high of 5% on Thursday morning, but as I discussed might occur, the market rallied on the belief that inflation will now begin to cool down. This view was also aided by the fact that 1/3rd of the CPI gain was due to rising used car and truck prices. Stuff stocks, homebuilders, and financials were slammed while buyers piled into NASDAQ techs. This helped the NASDAQ 100 Index along to a 1.05% gain on Thursday as it led the upside charge while the Dow and the S&P 500 lagged with 0.06% and 0.47% gains, respectively.

On Friday, the indexes edged higher again, but on lighter volume. The S&P 500 posted an all-time closing high while the NASDAQ Composite approaches its prior highs, but the gains were muted as the NASDAQ posted a 0.35% increase (0.27% for the NASDAQ 100) and the S&P 0.19%. The reality of this market is that the index action tells nothing of the real story under the surface, among individual stocks.

 

 

The 10-Year Treasury Yield ($TNX) dropped to its lowest levels since early March despite a rising consensus of higher inflation to come. This is a bit paradoxical since the market is clearly shrugging this off as it pushes interest rates back to the other side and money piles back into techs, which are seen as higher-PE names benefiting from lower interest rates.

 

 

Stuff stocks have come under pressure as the inflation trade loses momentum, and precious metals reflected that to some extent on Friday. Both the Sprott Physical Gold Trust (PHYS) and the Sprott Physical Silver Trust (PSLV) came in, with the PHYS gapping down to its 20-dema while the PSLV was moving higher early on Friday before flipping into the red to close at its 10-dma.

Both traded lighter volume, but I would certainly be on the alert here for any breaks below near-term support along the 10-day and 20-day lines in either the PHYS or PSLV. Flip-flopping leadership is a trademark of this current market environment. After some nice two-month up trends, precious metals could be in for deeper pullbacks.

The question is whether lower interest rates are a net positive for the metals or not. Typically, lower rates and ever-higher levels of QE have been the elixir driving the metals higher, but uncertainty has crept into the equation. We will likely gain some clarity when the Fed policy announcement comes out this Wednesday, which could be a market-moving event.

 

 

If the metals start to fail at near-term resistance, then look for the precious metals stocks to falter as well. I have no issue playing these long or short depending on the current trend, and if some of these want to correct and give me some decent, shortable downside, I am happy to take it.

Franco-Nevada (FNV) has been the leader among gold-related names, but it is now wobbling as a flag breakout from earlier in the week begins to falter slightly. Breaches of the 10-dma and then the 20-dema could trigger short-sale entries in the stock if they occurred, so I would remain open-minded and alert to the situation here.

 

 

Some of the weaker names in the group may also offer some reasonable short-sale targets, depending on how they play out from here. But we can see that Barrick Gold (GOLD) has clearly been in breakdown mode for several weeks now, and the 200-day moving average now serves a formidable resistance for the stock as well as a potential short-sale entry point.

Newmont Corp. (NEM) was on fire a month ago but has since lost momentum as it now finds resistance along its 10-dma and 20-dema. This may also be in a short-sale position using the 20-dema or the higher 10-dma as covering guides. While news from the Fed when it releases its latest policy announcement on Wednesday could change the backdrop for precious metals and their related stocks, the technical evidence is starting to build for some possible shortable downside.

 

 

Financials have been rallying in choppy uptrends for the past month on the premise of higher interest rates, but with the 10-Year Yield dipping to March levels the financials were whacked on Thursday. It’s not clear to me that I want to be shorting these here, as the most optimal entries would have occurred on Thursday as some of these names, represented by the group chart below, broke 10-dma and 20-dema support.

 

 

Lower interest rates might be seen as a positive for homebuilders, but the group remains under severe selling pressure as recent data shows that consumer buying plans for homes and appliances have plummeted.  D.R. Horton (DHI), Lennar Corp. (LEN), Pulte Home (PHM) and Toll Brothers (TOL) were all triggering as short entries on Wednesday, ahead of the CPI number, as noted in my Wednesday report.

The group has been breaking down for about the past month, so it is clear that the break isn’t related to interest rates, but the perception of a slowdown in the home-building cycle. The names below are now so far down in their patterns that they are well-extended below the 50-day moving averages, such that only weak rallies back up into the 50-day lines would offer any possibility of short-sale entries. I would monitor these names for such action, as there are no optimal short-sale entry points to be found currently.

 

 

Industrial metals are showing some divergence, at least among the four that I have focused on in recent reports. U.S. Steel (X) and Cleveland-Cliffs (CLF) have been moving higher thanks to a Thursday upgrade from a relatively obscure analyst firm that put a $38 price target on X and a $28 price target on CLF. These are both extended from buy points along their 10-dma and 20-dema earlier in the week.

Alcoa (AA) and Freeport-McMoRan (FCX) were in the camp of stuff stocks under pressure this past week, with both finding resistance along their 10-day and 20-day lines. I have considered these as reasonable short-sale targets along the moving averages with the idea of coming in along the 10-dma in each. This remains the case, and I would also watch for breaches of the 50-day moving averages as secondary short-sale triggers from here if they occur.

 

 

The big-stock mover of stuff, Caterpillar (CAT), was already faltering on a prior breakout attempt as it broke below the 20-dema on Wednesday, a potential short-sale entry trigger that has been discussed in previous reports. It then split wide open on Thursday. That was a secondary short-sale entry trigger at that point, and CAT is now extended on the downside, 6.1% below the 50-day line.

In this position we can see that it is undercutting some lows from late April, which could trigger an undercut & rally type move back up toward the 50-day line. This could potentially be played as a long swing-trade, with the possibility of flipping back to the short side if it falters near the 50-day line. But for now this is just something to watch for given the current downside extension.

 

 

We have seen other agriculture names get slammed lately, with issues like AGCO (AGCO), Corteva (CTVA) and Deere & Co. (DE) getting tagged on the downside over the past several weeks, as noted in reports of over a month ago. Bunged Ltd. (BG) has been attempting to hold tight along 20-dema more recently, but it finally busted the 20-dema on Thursday, offering a short-sale entry trigger at the line.

By Friday, BG was splitting wide open, much like CAT, as it busted the 50-day moving average and is approaching the May low. I would now watch to see how this sets up below the 50-day line, since weak rallies back up into the line could be viewed as secondary short-sale entries from here. Looking at the action in agriculture names, one would likely be surprised to see the major market indexes at or approaching all-time highs, but this speaks to the bifurcated nature of this market underneath the surface.

 

 

With agricultural operations and machinery stocks getting slammed lately, I am certainly open to the possibility that these could begin breaking lower as well. We’ve already seen Mosaic (MOS) break down on news that it would shut down two potash mine shafts the prior week, and it is now testing its 50-day moving average. A breach of the line would trigger a fresh short-sale entry if it occurs, so can be watched for.

CF Industries (CF) closed Friday just above its 20-dema and should be watched for any break below the line that would then trigger a short-sale entry at that point. The stock did manage to close positive on Friday but note that it closed in the lower part of its price range after attempting to rally earlier in the day.

Nutrien (NTR) has been the hands-down leader of the group but has made no real progress after gapping higher in a buyable gap-up type of move two Fridays ago. At the same time, it is showing some slight wedging action along the lows as it edges slightly higher.

 

 

The action in Nutrien (NTR) is better viewed on a larger chart, where we can see the wedging action over the past week following the buyable gap-up (BGU) move. Also note the two reversals on Monday and Thursday off the highs. I’m on the lookout here for any possible failure that might turn this into an aggressive, opportunistic short-sale target either on a break below the 10-day line or the even more aggressive approach of potentially shorting the stock up here with the idea of using the $66 level as a covering guide.

 

 

Agricultural commodities may be very different beasts in the current environment where monetary inflation is less of a factor in price increases while simple scarcity becomes the primary factor. Drought conditions in the western half of the country are severe this year, which could affect crop yields. In addition, corn-growing regions in South America are suffering from similarly parched conditions.

For those interested in playing food commodities, the Teucrium Corn ETF, the Barclays Bloomberg Coffee ETF (JO), the Teucrium Soybean ETF (SOYB) and the Teucrium Wheat ETF (WEAT) are best bought on weakness. Therefore, pullbacks to the 10-dma or 20-dema in all four are possible opportunities to look for. Note also that WEAT tested its 50-day line on Friday and bounced to close back above the 20-dema.

These are not for everybody, and the specific ETFs noted above tend to be thin, with JO trading just over 30,000 shares a day on average as the least liquid and WEAT 395,000 shares a day as the most liquid among the four. But in a market where thematic trends are difficult to find, at least on an intermediate-term basis, these may, I repeat may, offer some possibilities.

 

 

While money was mostly flowing into techs and growth names as the market focused on the theme of lower interest rates, my two hotshot techs turned short-sale targets, Roblox (RBLX) and Upstart (UPST) have played out as reasonable targets, at least on a tactical basis. Most, if not all, of the tech names that were rallying on Thursday and Friday were coming up from the lower regions of their charts, whereas these two are recent breakouts.

RBLX continues to play out as a Jesse Livermore Century Mark Rule on the short side set-up at the $100 Century Mark, where it initially ran into resistance at the end of the prior week and again this past Monday. Both moves were shortable when they failed at the $100 level, and the stock then broke below the 10-dma on Monday. Overall, since reversing at the Century Mark, RBLX is a very prime example of a stock that can be campaigned on the short side.

With RBLX, the last Century Mark entry near $100 occurred on Monday. It then broke below the 10-dma on the same day and opened roughly flat on Tuesday morning at 93.61 vs. Monday’s close at 93.44. That allowed for a quick re-entry and the stock then pushed down to the 20-dema where it bounced, and on Wednesday again tested the underbelly of the 10-day line.

From there, RBLX, broke back down to the 20-dema, bounced off the line for a short of moving average support, and then rallied back up into the 10-dma on Friday. It ended the day at 92.82, stuck in no-man’s land between the 10-day and 20-day lines. I would watch for any further weak rallies up into the 10-dma as lower-risk short entry possibilities. At the same time, I would be alert to any breaks below the 20-dema which would trigger fresh short-sale entries at that point.

 

 

Upstart (UPST) set up again perfectly for the shorts on Thursday with a bounce off the 20-dema that ran into resistance at the 10-day line and reversed before closing negative and just above the 20-dema. By Friday, the stock was busting the 20-dema where it triggered another short entry at the line and closed right above the 50-day moving average. This is now a later-stage, failed-base (LSFB) type of short-sale set-up, where weak rallies back up into the 20-dema can be used as possible short entries from here.

On a tactical basis, the way I handle something like this is to short it on the 10-dma break on Wednesday and again on the brief rally into the line on Thursday. One could then come back in again on Friday on the breach of the 20-dema. Now we can see whether it rallies back up into the 20-day line from here or simply triggers another short-sale entry if it busts the 50-dma.

 

 

Meanwhile, money is piling into some of the beaten-down cloud names, such as CrowdStrike (CRWD), which broke down after earnings the prior week but has since rebounded sharply off its 50-day line in a big V-shaped move. On Thursday it posted a low-range breakout on a pocket pivot volume signature, which was potentially actionable that day, and the stock is technically still within buying range of the low-range breakout using the top of the prior price range as a selling guide.

 

 

ZScaler (ZS) gapped up after earnings two weeks ago but then broke down all the way back to its 50-dma in a move that correlates closely to CRWD. It then also rebounded off the line on Monday and on Thursday posted a low-range breakout on a pocket pivot volume signature in a similar sharp, V-shaped move. Theoretically, this is still within buying range of the low-range breakout, using the top of the range as a selling guide.

 

 

Note how Snowflake (SNOW) posted its own low-range breakout on Monday but that failed on Friday as the stock dropped back below the 10-dma and the top of the low-range base. However, Friday’s action shook out at the 20-dema, which creates an opportunistic entry at the line while using the 20-dema as your selling guide.

 

 

So, we can see that not all cloud/software names are created equal as many cloud names rally over the past two days. Unity Software (U) is holding up after posting a five-day pocket pivot at the 50-day line on Monday but has been unable to make any substantial progress as it ran into some volume selling on Friday. That occurred at an area of overhead price congestion. So in this case I’d rather look to be a buyer on constructive pullbacks to the 50-day line, or possibly the 10-day line which has just crossed above the 50-dma.

 

 

Money has been much keener on coming into these bigger, more established cloud names like CRWD and ZS as well as DocuSign (DOCU), which jacked sharply higher after earnings two Thursdays ago. These are all names we were focused on last year as cloud leaders, but they all broke down earlier in 2021 and are now coming back with a vengeance. The question is whether these moves will lead to sustainable intermediate-term uptrends from here.

In any case, DOCU, which was actionable as a bottom-fishing type of BGU two Fridays ago after reporting earnings two Thursdays ago, is extended at this point. It does help to illustrate, along with CRWD and ZS, how the moves in these higher-PE techs are coming up from deeper down in their chart patterns where one is forced to resort to Ugly Duckling techniques to jump on them. This is of course doable, but requires some finesse without any assurance that such moves will result in sustainable price moves.

 

 

Semiconductors also rallied with the general moves in tech/growth names. We can see that something like semiconductor equipment maker Brooks Automation (BRKS), which broke below its 20-dema and 50-dma on Wednesday, has since rallied back above those moving averages and the 10-dma, the highest of the three, on light volume.

This could transpose back into a short-sale entry if it reverses back below the three moving averages, or it could result in the process of trying to set up along the 50-day line where one could attempt to buy it in here using the line as a selling guide. Play it as it lies.

 

 

My thinking is that if I want to play semiconductors on the long side, it may be best to focus on the semiconductor equipment manufacturers. Applied Materials (AMAT) would be my first choice as it pulls into the 20-dema with volume declining in orderly fashion. Lam Research (LRCX) is showing some supporting action along the 20-dema, so would also be a long candidate IF we see the tech rally sustain, as would BRKS.

If the tech rally, predicated on a low-interest rate theme, falters, then something like KLAC Corp. (KLAC), the weakest member of the group, would become my preferred short-sale target. The stock has been living below its 50-dma and would likely peel away to the downside if the tech rally falters and brings semis down with it. Otherwise, if we see breakouts in BRKS, AMAT, and LRCX, then I would expect KLAC to move above the 50-day line.

 

 

Despite the rallies in most semiconductors over the past two days, I don’t think we can draw any firm conclusions either way. For example, something like Western Digital (WDC), which I’ve discussed in recent reports, has a decidedly two-side look to its chart. On the one hand, it is currently holding a recent base breakout and re-breakout, albeit without generating any significant upside from there.

On Thursday it closed below the 20-dema, which was an initial, potential short-sale trigger in a possible base-failure type of situation. On Friday, it rallied back above the line but reversed along the 10-dma on increased but still light volume. From the perspective of volume levels, there has been no truly decisive resolution in either direction. If semis begin to falter, then I would look for a failure at the 20-dema as a short-sale entry trigger.

That said, we can’t discount the potential for WDC to hold the 20-dema and the breakout/re-breakout levels and move higher. That would likely occur in a continuation of the current rally in tech-related names. Indecisive action, to be sure, and all that is left to do at this point is to watch and wait for anything actionable in either direction.

 

 

The FOMO train left the station a while ago, and most of the stocks in my FOMO group list look spent, at least near-term. Yalla Group Ltd. (YALA) isn’t one of them, however, as it remains much slower and perhaps more orderly in its behavior. A very low-volume pullback to the 20-dema on Friday held, putting the stock in a lower-risk long entry position while using the line as a selling guide.

 

 

Tesla (TSLA) forces me to take a 360-degree view as it can’t make its mind as to whether the 200-day line is a long entry reference or a short entry reference. It has triggered in both directions along the line since chopping its way up off the lows of three weeks ago. As a NASDAQ 100 Index component, it has not participated in the recent two-day rally and remains well off its early-2021 highs.

On Friday it held tight along the 200-day line as volume declined to -56% below average, which qualifies as voodoo action at the line. This can be tested here as a long using the line as a selling guide, but TSLA hasn’t shown much tendency to obey the line as it has spent the last three weeks chopping its way higher while flopping around the 200-dma. It could still resolve to the downside, but the third possibility is that it continues to chop around with any resolution in either direction as it awaits earnings on July 21st.

 

 

In general, I find the current market action to be mostly uninspiring, choppy, and distinctly seat-of-the-pants. It doesn’t seem that difficult to pick off some tactical swing-trades long or short, but mostly the action among individual stocks is indecisive and, shall we say, flip-floppy. The big event of the week will likely be the Fed policy announcement on Wednesday, and I see no reason to make any major moves, outside of the swing-trading opportunities that crop up in real-time, ahead of the Fed.

The CPI number did not turn out to be a major market-moving event as it mostly resulted in rotation out of stuff stocks and interest-rate sensitive names like financials and into higher-PE and PE-expansion tech/growth names. So, while this market remains the “show that never ends,” it seems to me that right now we’re still waiting for the next big act to start, one way or the other. 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.

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