The Gilmo Report

June 2, 2021

June 2, 2021 6:56 pm ET

This week has so far seen the market stall and churn, with perhaps the best strategy being long oil stocks after buying them last week as they all mostly gapped higher yesterday on a positive OPEC report. Most of the patterns weren’t screaming buy at that time, however. The only way to play the move yesterday would have been to buy them Friday or jump on them early in the day yesterday on buyable gap-up type moves once they had established firm intraday lows.

Bonanza Creek Energy (BCEI) was still in a very clear buy position along its 10-dma yesterday at the open, and it pushed up from there to post a pocket pivot. Viper Energy (VNOM) yesterday posted a little gap-up move that did not qualify as a buyable gap-up but did qualify as a pocket pivot. Today it churned around but held the intraday lows of yesterday’s gap-up price range. So if one were truly in the mood to own this, then one could do so using yesterday’s low at 18.36 as a selling guide.

Otherwise, I wouldn’t be looking to chase these here. In addition, the oil patch tends to be subject to news, as was the case yesterday, and once the news dissipates these may simply drop back a bit. In any case, I’m not sure there is anything in this market that is a must-own situation for any serious trend-following action, although some festive swing-trades can be had by alert and nimble traders.

 

 

This is typical of how the long side of this market has worked lately. You have to park yourself in an area of the market that looks like it may have potential and then hope for a gap-up or other strong upside move from there. Three weeks ago, parking in a FOMO name or two as discussed in my May 16th video report would have likely resulted in some nice upside participation at that time. This was also the case for the industrial metals names as they rested on their 20-dema or 50-dma last week.

This week we’ve seen some very ugly-looking stocks pop higher, such as Workhorse (WKHS), which I blogged earlier today was the most heavily shorted stock vs. its float at a whopping 41.3%. At that time, it was trading under 11 and closed the day at 11.52. After-hours as I write, the stock is trading close above $13. Up another 10% after the close!

Thus, we can see that the FOMO element has come back to life in this market, with what have been some decent swing-trades off the lows, at the very least. WKHS is a garbage stock, in my view, but was discussed as another beaten-down FOMO name that could rally based on how oversold it was at the time. And so, the FOMO beat starts up again as retail investors have come back into the market, but how long this lasts is anybody’s guess.

 

 

The move in the oil patch inspired other stuff stocks to rally, including industrial metals, and the whole group was moving higher yesterday before running out of gas and coming in today. My favored industrial metals names, Alcoa (AA), Cleveland-Cliffs (CLF), Freeport-McMoRan (FCX) and U.S. Steel (X), all pulled back on lighter volume but are extended from any lower-risk entry points along their 10-day or 20-day lines.

I’d like to see how they handle any pullbacks to support along their 10-dma or 20-dema from here as potentially lower-risk entry opportunities. Otherwise, they are slightly extended in their current chart positions.

 

 

Fertilizers were also taken with the oil patch rally, with CF Industries (CF) and Mosaic (MOS) pushing back up to the highs of their current choppy consolidations.  The leader, Nutrien (NTR), broke out of a three-week flag formation yesterday on heavy volume and remains within buying range. Personally, I don’t like to chase this type of breakout coming straight up from the lows of the base. But technically it is within buying range, and I would at most use the 10-day moving average as a selling guide in order to keep risk tight given the uncertain general market action.

 

 

The NASDAQ Composite Index reflects some of that uncertainty as it has spent the past few days spinning around as it tracks sideways. It posted a doji day today on the candlestick daily chart below where there is little difference between the opening and closing levels, spinning around on heavy volume. When an index is going sideways we would prefer to see volume declining since today’s much higher volume gives the action more of a churning look, and at the very least indicates some uncertainty.

 

 

The S&P 500 Index also posted a tight doji day on its own candlestick daily chart, indicating some serious churning on volume that was higher than yesterday’s levels. Yesterday the index reversed off its intraday peak to close negative on higher volume vs. Friday’s levels, so what we have is a lot of stalling and churning this week on successively higher volume.

 

 

Treasury yields remain in sideways consolidations while the dollar continues to trend lower. Thus, precious metals have continued to hold up well. The Sprott Physical Gold Trust (PHYS) posted another higher closing high today after absorbing some selling yesterday following a gap-up open. The trend off the March lows remains very persistent, and the question in my mind becomes whether we start to see some sort of acceleration to the upside from here.

As I blogged this morning, the Sprott Physical Silver Trust (PSLV) remains in a very buyable position within the handle area of a decent-sized cup-with-handle extending back to February where it offers a lower-risk entry here at the 10-day line. The 10-dma then becomes your selling guide for the portion of your position bought up here as hopefully one was already buying this on the U&R way down at 8.84 on April 1st.

 

 

Gold-related names remain in squeaky-tight little flag formations, and the longer they continue to do so, the more buyable they become here. While I would love to see pullbacks to the 20-demas in Agnico Eagle Mines (AEM), Kirkland Lakes Gold (KL), Franco-Nevada (FNV) or Newmont Corp. (NEM), among other gold names I follow, as lower-risk entry opportunities they may simply hang tight along their 10-day lines and then move higher.

The primary question in my mind when it comes to precious metals stocks in general is whether they might get dragged down in any general market sell-off. That’s the one caveat about buying the stocks, and one reason why I tend to focus on the metals themselves via the PHYS, PLSV, or outright physical metals. My theory is that given the potential for much higher inflation, then this could turn out to be negative for stocks but positive for precious metals, resulting in a divergence – it all boils down to picking your spots and managing risk appropriately.

 

 

Silver miners mostly continue to trend higher. First Majestic (AG), Gatos Silver (GATO), and MAG Silver (MAG) are all extended while Coeur Mining (CDE) pulls into its 10-dma, albeit on heavy selling volume. If it can hold the 10-day line, then this pullback may offer a lower-risk entry. Otherwise, the other three names remain extended.

 

 

Chinese EV names have been former FOMO names on fire again lately, but the moves are getting a bit extended at this point. Li Auto (LI) looks more like a short as it runs into resistance at its 200-day moving average, while NIO (NIO) and Xpeng (XPEV) are well extended. They also lost some momentum today. Niu Technologies (NIU) might be an interesting long candidate here as it sits on the 50-day line with volume declining.

Thus, with NIU, one could test the long side here while using the 50-day line as a selling guide. If it reverses back below the 50-dma, then it could trigger as a short-sale entry at that point if that occurs.

 

 

I’ve been watching the Bitcoin-related stocks as they engage in mostly shallow rallies, such as we’ve seen off the lows in Marathon Digital Holdings (MARA) and Riot Blockchain (RIOT), both of which are Bitcoin miners. Silvergate Capital (SI) has had the best move off the recent lows, but it is a crypto-banking/brokerage company so in a slightly different area. It has rallied up to its 50-day line where it continues to run into resistance.

Note, however, that it is holding just above its 10-dma and 20-dema, so it is possible that it could attempt to set up and push above the 50-dma. If it can’t, then it remains a short at the line which then becomes your covering guide. I would also watch this in conjunction with Bitcoin itself, since any deeper sell-off in the crypto-currency could provide the catalyst for a break in SI, MARA, or RIOT back to the downside, while a recovery in Bitcoin back above its 200-day line could trigger similar moves in these stocks. Play ‘em as they lie.

 

 

The chip shortage story continues to rage on, with Intel (INTC) stating over the weekend that it expects the shortage to continue for the next couple of years. This initially put a bid under semiconductor equipment manufacturers, in the cases of KLA Corp. (KLAC) and Lam Research (LRCX), the moves turned out to be shortable.

KLAC ran into resistance at its 50-day moving average, where it reversed on higher selling volume. It remains a short on rallies into or just above the 50-day line, using the 620-chart to time entries if one is interested in shorting this name. I tend to think that the whole chip shortage thing is a bit long in the tooth and is therefore mostly priced in – it certainly was in KLAC.

 

 

Lam Research (LRCX) is a variation on this theme, but instead of moving average resistance it ran into price resistance at the April highs yesterday where it reversed on higher selling volume. I discussed this as something to watch for in my weekend report, and it also applies to Applied Materials (AMAT) which is flirting with its April highs. However, AMAT appears to act better, so if I’m looking to short this area of the market, I might favor KLAC and LRCX as potential short targets.

 

 

There aren’t many clear-cut charts among semiconductors with respect to long entries, but one could watch names in the group as they try and find their way. For example, Micron Technology (MU) looks like a two-sided situation here since resistance at the 50-day line came into play yesterday, thus it could play out as a short with entries as close to the line as possible.

The flip side of this is that it could hang along the 20-dema for a few days as volume continues to dry up and then attempt to launch through the 50-day line on the upside. That’s another possibility, and so I would simply pick the biggest names in the group and keep a close eye on those as they push up into moving average or price resistance, such as Advanced Micro Devices (AMD), Qualcomm (QCOM), and Qorvo (QRVO), for example.

 

 

Among big-stock NASDAQ names, Microsoft (MSFT) triggered a short-sale entry at its 50-day moving average yesterday and then trickled a little lower today. This would remain a short on rallies into the 50-day line, which is then used as a covering guide.

 

 

Apple (AAPL) and Amazon.com (AMZN) are again testing support at their respective 200-day moving averages as volume declines. These may work as lower-risk long entries using the 200-day line as a selling guide, but a breach of the line by either would trigger a short-sale entry. Another possibility is that these rally back up to their 50-day lines where they may offer lower-risk short-sale entries into the rallies, depending on how they play out from here.

 

 

Facebook (FB) and Alphabet (GOOG) are holding up near their current highs in cup-like formations that could play out in either direction since they are also in double-top land. Obviously, if the general market starts to come in, then these could pull back, and then we would have the opportunity to see whether the pullbacks become buyable or shortable as double-top situations.

 

 

Salesforce.com (CRM) has played out as a shortable gap-up after busting the 237.83 intraday low of last Friday’s gap-up price range. That triggered as a short yesterday, but it was able to find near-term support at the 200-dma. Today it headed back down toward the 200-dma, and we can watch to see if a secondary short-sale entry materializes on any break below the 200-day line.

 

 

ZScaler (ZS) has also mostly worked out as a tactical shortable gap-up following its own post-earnings gap-up move to prior price resistance last Wednesday. It has been coming in on light volume, however, so another test of the prior highs might be in store. If that occurs, I would be on the lookout for any further reversals along those highs that might present a possible short-sale entry.

 

 

DataDog (DDOG) remains a short-sale target as close to the 200-dma as possible after reversing at the line last Friday, as discussed in my weekend report. It is hanging tight just below the 200-day line so remains in an unclear position. I would simply watch for rallies up to the 200-dma as potential short-sale entries while using the line as a tight covering guide.

 

 

Crocs (CROX) is playing out as a short-sale target here after closing below its 20-dema today on above-average selling volume. That puts it in a short-sale position right here using the 20-dema as your covering guide. It closed at 100.02, so remains two pennies above the $100 Century Mark. However, with today’s close below the 20-dema, look for a break below the $100 level as confirmation of CROX as a short-sale target.

 

 

Dicks Sporting Goods (DKS) has so far been a short near its own $100 Century Mark, but has only given shorts about 5% of downside, assuming one has entered their short position as close to $100 as possible. Otherwise, it isn’t giving up much ground yet, so I’m still watching this for any further rallies up into the Century Mark as possible short-sale entries. Otherwise, if it can decisively clear the $100 level, then it could trigger a long entry per Jesse Livermore’s Century Mark Rule for the long side..

 

 

I’m seeing weakness in other retail names, despite all the re-opening talk about pent-up demand. As I’ve noted before, consumer spending is now at levels far above where it was at its peak before the pandemic began last year, so it is debatable just how much pent-up demand exists. This morning I blogged about Canada Goose (GOOS), Lululemon (LULU), and Nike (NKE) as possible short-sale targets as they flirt with near-term support.

GOOS closed below its 50-day line today, so can be treated as a short here or on any further rallies to the highs of the past four days, where it ran into resistance and reversed today. If one elects to short the stock here, then the 50-day line serves as your covering guide, with the option to re-enter the short near price resistance around 41.50.

LULU closed just above its 50-day line today but could trigger as a short-sale entry here if it reversed back through the line. NKE, meanwhile, reversed at its 20-dema today and closed below the line, so could be viewed as being in a shortable position using the 20-day line as a covering guide. However, notice that it actually ran into resistance along its prior May price highs in a double-top position yesterday, so it may be that weak rallies back up toward those highs, assuming it can regain the 20-dema, may be the second option as potential short-sale entries.

 

 

This remains a sloppy environment, but alert swing-traders can find opportunities long or short if they are monitoring the right stocks at the right time and have a good sense of what the market will give them. Of course, a lot of this is seat-of-the-pants type stuff, where one has to pick off set-ups in real-time as they form. This is often easier said than done, but I will do my best to point out any set-ups that I see on my live blog, so stay tuned there.

Precious metals remain one area where a potentially sustainable trend may be in progress, and I have maintained a position-building approach to both gold and silver as they continue to trend higher, set up, and then trend higher again after our initial entry signals on the undercut & rally set-ups we saw in both PHYS and PSLV in late March/early April. Otherwise, this remains a market where trend followers can simply stand aside and let the market sort itself out. That is all.

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.

____________________________________________________________