The Gilmo Report

June 21, 2020

June 20, 2020 6:07 pm ET

The general market indexes continued to demonstrate that they can take a licking but keep on ticking higher early in the week as the NASDAQ Composite Index and NASDAQ 100 Index both tested the rarified air above the 10,000 level. The NASDAQ failed to hold the 10,000 mark by Friday’s close, however, while the NASDAQ 100 just barely held on to close at 10,004.31.

But the action was far from bullish on Friday. A very volatile quadruple-witching options expiration session saw the market open sharply to the upside before all the major market indexes reversed to close in the red. Volume was obviously very heavy as a result of options expiration, resulting in a big stalling and churning day for the NASDAQ on heavy volume.

 

 

The S&P 500 Index and the Dow had a similar look on Friday as both were hit much harder on the downside than their NASDAQ cohorts. The Dow remains below its 200-dma after reversing at the line on Friday on very heavy options expiration volume.

 

 

I hear a lot of talk among the pundits that the market has taken on a so-called risk-on character, but I’m not seeing in the Russell 2000 Index which is typically a barometer for risk-on sentiment. The Russell’s proxy, the iShares Russell 2000 ETF (IWM), reversed hard at its 10-dma on Friday on heavy volume. The small-cap risk-on index remains well below its 200-dma.

 

 

While equity indexes turned red on Friday, precious metals rallied. Gold futures cleared the $1750 level by week’s end, sending the Sprott Physical Gold Trust (PHYS) gapping up to higher highs. It is now pushing up toward the highs of the 10-week base it has been working on since early April.

Friday’s move came on a five-day pocket pivot volume signature. But, as I pointed out in earlier reports, gold was already quite buyable along the 50-dma before Friday’s gap. I view it as being slightly near-term extended in this position with the 50-dma serving as near-term support.

 

 

Silver also gapped up as silver futures make another run at the $18/oz. level. The Sprott Physical Silver Trust (PSLV) posted a five-day pocket pivot on Friday as volume picked up significantly. It missed a ten-day pocket pivot by one day. Remember that I look for a cluster of five-day pocket pivots in lieu of a single ten-day pocket pivot.

So far, all we have is one five-day pocket pivot. The PSLV was last buyable on the undercut & rally move through the prior 62.22 low and off the 200-dma earlier in the week as discussed in last weekend’s report. In this position it may remain buyable using the 20-dema as tight selling guide or the 200-dma as a wider one.

 

 

Big-stock NASDAQ names continue to chop around with some of the Fantastic Five looking like they are forming little v-shaped double-tops. On the group chart below we can see that Apple (AAPL) spun around quite a bit on Friday and made a half-hearted attempt at new highs before settling down just above its 10-dma on very heavy volume.

While the 10-dma serves as near-term support, this level needs to be watched for carefully. As I discussed in my Thursday video report, if the market goes down, it’s likely that it will at least partially be led by AAPL, which announced the re-closing of its stores in several states after spikes in Covid-19 infections.

Amazon.com (AMZN) is also in a short v-shaped position, stalling around the highs on Friday on heavy volume. Facebook (FB) posted a pocket pivot at its 10-dma on Friday, thanks to heavy options expiration volume, but it was buyable along the 10-dma per my prior comments on the stock.

Alphabet (GOOG) is attempting to hold support at its 20-dema. This may put it in a lower-risk entry position, but it can also be watched for a breach of the 20-dema which could trigger it as a possible short-sale. Microsoft (MSFT) pulled a double-top reversal after attempting to post new highs on Friday. This is extended from any logical lower-risk entry point, and the action on Friday would seem to imply a deeper pullback is in the offing.

 

 

Netflix (NFLX) continued rallying all week long before finally ending the week near the prior range highs. If the general market continues to weaken this coming week, I would look at this as a possible stock to stalk on the short side up around the range highs. Obviously, it is extended from the 50-dma where it was last buyable, and it is now a matter of seeing how this acts as it makes a potential run for higher highs.

 

 

Tesla (TSLA) has frustrated anyone trying to play it as a Livermore Century Mark set-up either long or short. It indecisively pirouetted around the $1,000 price level all week long before closing just above at 1000.90. This is therefore still a 360-degree situation.

If it can hold the $1,000 level, then it plays as a long using the Millennial Mark as your selling guide. Otherwise, one can attempt to short it on any break below the $1,000 level. Easier said than done, until it finally resolves this consolidation along the $1,000 level more decisively in one direction or the other.

 

 

Semiconductors are weakening again. After bouncing sharply off deep support on Monday, most have lost momentum and stalled or reversed badly on Friday. This includes the six semiconductor names I’ve discussed in recent reports: Applied Materials (AMAT), Advanced Micro Devices (AMD), Micron Technology (MU), Nvidia (NVDA), and Western Digital (WDC).

After three days some are showing reversals or stalling at their 10-dma where they are or were shortable such as AMAT, MU, NVDA, and QCOM all stalled and/or reversed from double-top types of positions after sharp bounces off the Monday lows.

Meanwhile AMD continued its pattern of stalling and reversing on rally attempts over the past several days. It attempted to move higher on Friday but was slapped back into negative territory and near-term support at its 50-dma. This either puts the stock in a lower-risk entry at the 50-dma or is presaging a breach of the 50-dma which would then trigger the stock as a short-sale at that point.

WDC posted a pocket pivot at its 50-dma on Friday. Volume was quite high thanks to options expiration. Technically, this puts WDC in a potentially lower-risk entry using the 50-dma as a selling guide. Overall, the semiconductors are mostly representative of a whole lot of choppy, directionless action that becomes buyable at extreme lows and shortable at the highs.

 

 

Slack Technologies (WORK) has managed to maintain support at its 20-dema after regaining the line on Thursday. Previously, as I discussed in my Wednesday report, weak rallies into the line could potentially offer short-sale entries. But that is no longer a factor with the stock now sitting above the line.

The stock has perhaps gained new life as a result of recent spikes in new Covid-19 cases around the country, keeping the work-from-home theme alive. One can treat this as a long entry here using the 20-dema as a tight selling guide. At the same time, in 360-degree fashion, a break below the line could trigger the stock as a short-sale entry at that point.

 

 

Cloud names I’ve discussed in recent reports have, for the most part, remained strong, but several ran into problems on Friday. Below is a group chart of CrowdStrike (CRWD), Citrix Systems (CTXS), DocuSign (DOCU), RingCentral (RNG), Zoom Video Communications (ZM), and ZScaler (ZS).

CRWD closed just above the $100 Century Mark, so is now in a long entry position using the $100 level as a tight selling guide. Of course, this is a 360-degree situation, as a break below the Century Mark could trigger this as a short-sale based on Livermore’s Century Mark Rule for the short side using the $100 level as a covering guide.

CTXS reversed hard on Friday along its prior May highs, triggering it as a short-sale at that point on an intraday basis. This has been a bit tricky over the past three days as it has reversed off the highs twice. But I continue to stalk it on the short side whenever it rallies back up to the range highs. Watch the 50-dma here closely as a break below the line could confirm the prior short entry along Friday’s highs.

DOCU will become a member of the NASDAQ 100 Index effective Monday and has continued to steadily rally higher. This is getting quite extended, however, and once its inclusion into the NASDAQ 100 is official I would watch for a move back to at least the 10-dma from here.

RNG is like CTXS in that it has now reversed from the highs of a well-defined price range two out of the past three days. Friday’s reversal was much uglier given the heavy selling volume. I continue to view this as a short near the range highs, using my 620-chart to stalk it into any rallies back up near the highs.

ZM continues to make new highs, but volume is starting to wane. Obviously, this is not in a buyable position and is likely primed for a pullback to its 10-dma from here.

ZS broke out of a short flag earlier in the week as it decisively cleared the $100 Century Mark. But as is the case with most breakouts, it failed on Friday. From here we can watch to see how well it holds near-term support at the Century Mark, with the 10-dma serving as secondary support a bit lower in the pattern.

 

 

The smaller clouds I’ve liked in recent reports continue to act well. Bill.com (BILL) acts well as it looks to build the right side of a potential base. However, it is only buyable on pullbacks to the confluence of the 10-dma and 20-dema.

Meanwhile, CloudFlare (NET) finally reversed off its highs on Friday after a blistering run off the 20-dema that started on Monday. As I noted in last weekend’s report, this was the only long set-up I felt strongly about, and it worked quite well. As I noted in Wednesday’s report, I view the extended run as one to sell into, and that remains the case as we see how NET consolidates its recent strength.

 

 

Shopify (SHOP) is interesting here as it again shows stalling again at a Century Mark, this time at the $900 level. Notice how it looked weak on Wednesday as it stalled in a tight little range on light volume, looking like it was losing momentum. In this market, however, that can fool you.

Obviously, one could have played the move back above the $800 mark earlier in the week as an entry based on Livermore’s Century Mark Rule on the long side. Now that it’s running into resistance at a new Century Mark at $900 after reaching an intraday high of 895.56 on Friday, it’s possible that this new Century Mark serves as more solid, and hence potentially shortable, near-term resistance after an extended 12% run from the $800 level this past week.

 

 

Enphase Energy (ENPH) broke hard on Wednesday on a report from a Prescient Point Capital Management accused the company of falsifying its sale numbers. It is interesting to note that the stock was in fact shortable on Tuesday at the 20-dema, perhaps in anticipation of Wednesday’s news.

ENPH was defended with an upgrade to buy by a second-line analyst firm on Thursday, but all that did was bring it right up into the 50-dma where it was shortable again on Friday. It then reversed at the line to close near its intraday lows. I would continue to look for rallies into the 50-dma from here as short-sale entry opportunities.

 

 

ENPH’s cousin, SolarEdge (SEDG) sold off on Wednesday in sympathy, but because the news appeared to be specific to ENPH it regained the 10-dma on Thursday before testing and stalling at the Tuesday highs. I still think this needs to be watched given its extended position on the right side of a very deep punchbowl formation as discussed in Wednesday’s report.

A break below the 10-dma can be watched for a possible short-sale trigger. This would likely occur during a more sustained general market pullback, however, unless someone decides to accuse SEDG of cooking their books as well.

 

 

Alpha Pro Tech (APT) caught fire on Thursday after California’s Governor declared a broader mask requirement for state residents. As I discussed in Wednesday’s report, it posted a pocket pivot at the 50-dma that day, and one could “look for small pullbacks into the line as lower-risk entries.”

A small pullback into the 50-dma on Thursday provided that entry opportunity, and APT took off from there. The stock was quite volatile on Friday as it swung from an opening price of 16.01 down to an intraday low of 14.50 before closing at 16.79. Obviously, it is now extended, but offered a very nice, high-velocity, high time-value trade off the 50-dma.

 

 

The other four Covid-19 related names I discussed in Wednesday’s report all remain in consolidations, with potential entry opportunities at near-term support. For BioNTech (BNTX) this would be here along the converging 10-dma, 20-dema, and 50-dma. This may offer lower-risk entries while the stock is quiet using the moving averages as selling guides.

Inovio Pharmaceuticals (INO) is extended from its 10-dma and 20-dema and can be watched for lower-risk entries on pullbacks to the short moving averages. Moderna (MRNA) is also extended from its 10-dma and 20-dema and can be watched for any opportunistic pullbacks into support at the lines for lower-risk entries.

Sorrento Therapeutics (SRNE) looks constructive as it holds tight sideways along its 10-dma and 20-dema. On April 24th, the company issued a prospectus supplement to offer $250 million worth of its stock in a secondary offering. This is on top of a $1 billion mixed shelf-offering it filed on March 13th, and it may mean this goes nowhere until these offerings are finally completed.

 

 

Once again, a serious word of caution with these stocks: They are highly news-oriented and can gap down as easily as they can gap up depending on the news flow regarding their various vaccines and remedies for the Coronavirus. I consider them appropriate for high-risk players who can handle the risk. The other alternative is to only traffic in small positions in these stocks with the idea that a major price move, which they tend to have from time to time, provides the leverage for a nicely profitable trade while keeping position size exposure to a minimum.

For newer members: Please note that 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 (thin black line). In all cases I will mostly use the shorthand version of “10-dma,” “50-dma,” etc.

I noted in my Wednesday report that at the time I was finding more short-sale set-ups that were working. However, by Thursday, I noted some constructive set-ups in my video report of that evening. Those set-ups mostly resulted in further upside on Friday, but all of that dissipated by the close as the indexes reversed into the red.

As I’ve said many times before, this rally is all about one thing and one thing only: QE to Infinity & Beyond. This past week, however, the Fed’s balance sheet contracted as the chart from the St. Louis Fed below shows. One thing I’ve been watching for is an air pocket to develop in QE, at least short-term, that could trigger a pullback in stocks.

 

 

I’m not sure if this is the necessary catalyst I’ve been looking for, but it is something to take note of. Ultimately, we go with the set-ups at hand, and all I know for sure is that most if not all the long set-ups I saw on Thursday turned into shortable rallies by Friday. The mass of reversals off the highs that you see in the stock charts included in this report make that point quite poignantly.

Eventually, the Fed will need a new excuse to continue expanding its balance sheet. A severe stock market pullback combined with a second wave of Covid-19 amid an economy that is still nowhere close to normalization, not even half-way close to normalization some might say, might provide that excuse.

In the meantime, I’m watching the set-ups closely, and for now I find a 360-degree state of being seems to permeate most stock charts. So, stay alert, remain flexible, and, as I’ve discussed in recent reports, know where your out points are by reviewing trailing and absolute stops as well as selling guides based on the Seven-Week Rule.

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

At the time of this writing, of the stocks mentioned in this report, Gil Morales, MoKa Investors, LLC, Virtue of Selfish Investing, LLC, and/or Gil Morales & Company, LLC held positions in PHYS and PSLV, though positions are subject to change at any time and without notice.

Gil Morales & Company, LLC (“GMC”), 8033 Sunset Boulevard, Suite 830, Los Angeles, California, 90046. GMC is a Registered Investment Adviser. This information is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to GMC, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Gil Morales & Company, LLC. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2008-2020 Gil Morales & Company, LLC. All rights reserved.