The Gilmo Report

June 16, 2021

June 16, 2021 7:03 pm ET

Today’s action after the Fed meeting nicely encapsulated the hot mess that this market has become. The Fed apparently had nothing encouraging to say to the markets today when they released their latest policy announcement. In classic Orwellian fashion, Fed Chairman Jay Powell did try to strike a positive tone with, “The Fed is making progress toward its inflation goals.” Translation: Expect higher inflation.

This sent the Ten-Year Treasury Yield ($TNX) higher, as it pushes up off the lows of the three-month consolidation it has been in since moving sharply higher earlier in the year. The dollar also jacked higher today, upsetting the market’s apple cart and sending the indexes lower right after the Fed announcement and the start of the Fed Chair’s press conference.



The intraday action initially took the NASDAQ Composite down over 100 points before it rallied back into positive territory in the last half hour. It closed down -0.24% on higher selling volume. The intraday action was so incoherent, it’s difficult to say whether it was bona fide support at the 10-day line or just another battle of the algos as the index technically logged a distribution day off the recent highs.



The S&P 500 was only slightly less volatile than the NASDAQ, and by the time the massive cloud of dust settled at the close, it logged a distribution day with a -0.54% decline on heavy selling volume. All in all, a day of erratic action for the indexes, with few clues as to where we are headed in the coming days.



While the Fed policy announcement was certainly the highlight of the week, what has struck me most about the action this week is just how certain stuff stocks have been rudely dismantled. Industrial metals names that we have been following for some time, namely Alcoa (AA) and Freeport-McMoRan (FCX), melted down again today as they closed further below their 50-day lines after gapping through them yesterday.

Cleveland-Cliffs (CLF) has come in from last week’s highs and is holding support at the 10-day line. A breach of the line of course would trigger this as an aggressive short-sale entry at that point. If one is bullish on the stock, one could also test this on the long side here with the idea of flipping out to the short side if it fails to hold 10-dma support.

U.S. Steel (X) is in a short-sale entry position just below its 20-dema with the line also serving as a covering guide. Generally, I prefer to enter this on the short side into rallies, so if I saw any kind of bump up through the 20-day line and into the 10-dma, I would prefer that as an entry vs. shorting it right here.



We had already seen several agricultural names, like AGCO (AGCO), Deere & Co., (DE), Corteva (CTVA), and Bunge Ltd. (BG), come apart over the past few weeks, so hints of a stuff stock rout have been there for all to see. Lately the fertilizers have broken down in earnest, although Mosaic (MOS) and Intrepid Potash (IPI) were already busted prior to this week. Note that MOS triggered yet another short entry, this time at the 50-dma on Monday.

CF Industries (CF) triggered a short-sale entry at the 20-dema on Monday and has run into resistance at the line over the past two days. Each move up into the 20-dema offered short-sale entry over the past two days and CF headed lower today.

Over the weekend I discussed looking for an aggressive short entry in Nutrien (NTR) if it busted the 10-dma, and it did so quite obediently on Monday. It then triggered another short-sale entry today at the 20-dema as it continues to sell off. Rallies back up into the 20-dema could offer short-entries from here, but the optimal entry was the aggressive one at the 10-dma on Monday per my comments over the weekend.



Homebuilders continue to get smothered. D.R. Horton (DHI), Lennar Corp. (LEN), Pulte Home (PHM) and Toll Brothers (TOL) were all down again today, with DHI, PHM, and TOL posting lower closing lows. At this point, we are watching for any rallies back up into the 10-dma or 20-dema as possible short entries here, but for the most part the time to get short was earlier per my previous reports.



We’ve also seen financials come apart this week as both J.P. Morgan (JPM) and Citigroup (C) announced that they will see lower trading revenue. This has led to steep slides in both stocks as other financials waver along near-term support. The group did take some solace today in the fact that interest rates rose, but most of these names were already extended on the downside.

And somehow I don’t think I can bring myself to buy the supporting pocket pivot in Bank of America (BAC) today. I might consider, however, shorting Goldman Sachs (GS) here just below the 20-dema while using the 20-dema as a covering guide. Morgan Stanley (MS), meanwhile, can be watched for possible shortable rallies into the 10-dma from here.



Higher interest rates were not received well by precious metals, however, and the Sprott Physical Gold Trust (PHYS) closed just below its 200-dma on heavy volume today. As I wrote over the weekend, I was looking for this to test the 200-day line, but of course if it can’t hold support here then lower lows are likely in the cards for gold.



The Sprott Physical Silver Trust (PSLV) broke near-term support at its 20-dema today as volume increased but remained well below average. However, the 20-dema served as a selling guide for at least any portion of any position in the PSLV bought at current price levels along the line. For my money, I just back away from my entire position in PSLV and wait for the dust to settle.

As I’ve explained before, higher rates are initially a negative for the precious metals, but if they are accompanied by expanding inflation, than low or negative real interest rates can become a supporting factor. However, the only way to determine when this occurs is by watching the charts and looking for those typical Ugly Duckling set-ups to show up whenever they decide to do so.



As I stated over the weekend, “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.”

Well, we got those short-sale trigger moves today when Agnico-Eagle Mines (AEM) and Kirkland Lakes Gold (KL) reversed at their 10-day and 20-day lines. Those were clear short-sale entry triggers, and the stocks headed lower from there. AEM also triggered at the 200-dma and is slightly extended on the downside such that weak rallies into the 200-day line would offer potential secondary short-sale entries from here.

Franco-Nevada (FNV), the strongest of the gold-related names, reversed from its intraday highs to close negative and just below the 10-day line. This can therefore be utilized as an aggressive short-sale trigger here while using the 10-day line as a tight covering guide.



Members know that I don’t ever chase weakness on the downside any more than I chase strength on the upside. The fact is that the short side of many things of the stuff variety was already in play days or even weeks ago. The charts of stocks like Caterpillar (CAT) and Deere & Co. (DE) attest to that, but we can still wonder at the severe carnage we’re seeing in what were formerly two solid stuff stock leaders just a few weeks ago.



Roblox (RBLX) gapped down this morning and broke for its 50-day moving average, where it found intraday support. The stock was sputtering around its 20-dema yesterday but had already given shorts a reasonable entry point at the 10-day line on Monday. RBLX has done well for the shorts since its initial Century Mark short-sale entry around the $100 price level last week.

That, of course, is based on Jesse Livermore’s Century Mark Rule in Reverse for the short side. For those of you unfamiliar with the whole concept, this article explains it all. Since the initial Century Mark short-sale entry last week, RBLX has since evolved into a potential, later-stage, failed-base, short-sale set-up.

This was confirmed today when it decisively busted the 20-dema before finding support today at the 50-day line. In this position, the stock is sitting just below its prior base breakout point. I would watch for weak rallies into the 20-dema as potential short-sale entries from here.



Upstart (UPST) has given shorts plenty of action over the past several days, starting with the breach of the 10-day line that coincided with a breakout failure. The stock then gave shorts one more chance to hit it at the 10-dma last Thursday before breaking through the 20-dema on Friday and confirming its status as a later-stage, failed-base type of short-sale set-up.

Today UPST closed just below the 50-dma which can be viewed as a third short-sale entry spot using the line as a covering guide. However, given how extended the stock is, down 18% from its 10-dma and the initial short-sale entry point last week, one might look for a rebound up toward the 20-dema. This can be used as a covering guide for a more opportunistic short entry if they can get it. So far, however, it has worked well as a short-sale target since I first began discussing it a couple of reports back.



What helped to keep the NASDAQ relatively more buoyant today was the action in cloud names. In the group chart below we see persistent rallies in CrowdStrike (CRWD), DataDog (DDOG), DocuSign (DOCU) and ZScaler (ZS).

These moves are getting extended, and in cases where a potential double-top is forming on the chart, we might consider stalking these as short-sale candidates if the NASDAQ weakens further. After-hours as I write, the NDX futures are dropping -0.65% on the day, slightly less than twice the -0.34% drop seen in the NASDAQ 100 Index during the regular session.



I would suggest examining the four stocks above on longer-term daily charts where we can determine potential price resistance. CRWD, DOCU and ZS are now within about 5% or so of their late February highs and all have a similar look. The daily chart of CRWD can suffice for all three, but if you are interested in stalking these on the short side, then I suggest studying the charts of all three.



DDOG is a slightly different variation on the same theme. It broke out of a low-range base last week but is well below its late-February highs. However, note that it is now rallying into an area of potential overhead price congestion. This could present some near-term resistance, particularly if the general market continues to weaken.

This type of short-selling is extremely opportunistic and very tricky as one looks for a possible reversal to develop as the stock rallies. We can see that DDOG stalled somewhat today, and if one were stalking this one on the short side, then the 620-chart would have been the tool to use to time a possible short entry.



If we examine DDOG’s five-minute 620-chart, we can see a sharp rally right at the open that eventually loses momentum in the 99 to 99.50 price range. At that point, a bearish MACD cross occurs and the stock heads lower from there. The tricky part is where the sudden rally occurs when the NASDAQ rallied sharply off the intraday lows and into positive price territory in the last hour of trade.

One would have likely been forced to cover, but another bearish MACD cross going into the close occurred in the same 99 to 99.50 price zone. So, it’s quite possible one might have shorted this and come up empty-handed or with just a small profit. But this is how one approaches this type of short-sale entry, remaining extremely nimble, flexible, and most of all persistent as one tests potential short-sale entries.

The idea is that eventually one will catch, and the stock will break down sharply. I’ve shown how this works in real-time via my Live Blog, so members can gain some understanding of how to approach it. It’s not easy, and it is not for everybody, but it is the way that I approach shorting stocks into double-top formations or rallies into overhead price congestion that move beyond a moving average. (CRM) is a big-stock cloud name in a double-top position, where it did in fact run into resistance yesterday as it backed down. Today it found support at the 10-day line and rallied off the intraday lows, so was probably another supporting actor in the NASDAQ’s relatively buoyant action today. However, the 10-day line also helps in determining a possible aggressive short-sale entry trigger if CRM breaks below the line, so adds a little more concreteness to the set-up.



Of course, one could also focus on the weaker cloud names, such as ServiceNow (NOW) and Workday (WDAY). Both ran into their 200-day moving averages today and stalled. NOW remains just below its 200-day line, so is in the lower-risk short entry position using the line as a covering guide.

WDAY is the weaker of the two as it has simply rallied off its recent chart lows and spun out badly at its own 200-dma. It closed about 2% below the line, so any weak rally up closer to the 200-day line would be my preferred entry if I can get it.



Snowflake (SNOW) is a more orthodox example where moving averages come into play and offer cleaner entry points as the stock breaks moving average support. In this case, the set-up is simple – once SNOW breaks the 10-day line, then that triggers a short entry using the line as a covering guide. For now, SNOW remains a short-sale target here under the 10-day line.



If we continue to see stocks correct, then expect that semiconductors may present some opportune short-sale targets as they break down from recent highs. Today we saw short-sale entry triggers at the 50-day moving average in Brooks Automation (BRKS) and KLAC Corp. (KLAC), so these are actionable as close to the underbellies of their respective 50-day lines which then become your covering guides.

Applied Materials (AMAT) and Lam Research (LRCX) are both testing their 20-demas but can be watched for any breaks below the 20-day lines as short-sale entry triggers. As I wrote over the weekend, IF the general market is going higher then I would tend to favor the semiconductor equipment makers. But IF not, then they become potential short-sale targets under the right conditions just like anything else.



After discussing Western Digital (WDC as a potential short-sale candidate over the weekend, I blogged yesterday morning about going after the stock on the short side as it rallied into its 10-day moving average early in the day. WDC stalled slightly at the 10-dma yesterday, but today cooperated by busting its 20-dema. This triggered a base-failure type of short-sale entry at the 20-day line which of course becomes my covering guide. Any further rallies into the 20-dema from here would offer additional lower-risk short-sale entries from here.



Today’s action accentuated the crazy seat-of-the-pants nature of this market which makes it difficult for anyone trying to participate. As I’ve said, this is at best a market for swing traders, while intermediate-term trend-following investors are advised to stay on the sidelines. That has not changed.

What has changed, perhaps, is the possibility that the short side gains more momentum as we start to see current leadership groups, mostly in rebounding tech names, potentially break down in any continuing market correction. Until evidence to the contrary presents itself, that is what I am gunning for right here right now, and I will expand on this during the remainder of this week in my blog posts and video reports as things develop. 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.