The Gilmo Report

June 24, 2020

June 24, 2020 6:51 pm ET

The NASDAQ Composite and NASDAQ 100 Indexes, led by the biggest NASDAQ 100 stocks, both started the week off by decisively clearing their respective 10,000 levels. The five big-stock NASDAQ names that I have referred to as the Fantastic Five now account for nearly a 50% weighting in the NASDAQ 100.

This of course doesn’t become a problem until it, well, becomes a problem. And it became a problem today as the major market indexes swooned to the downside. The NASDAQ Composite broke 2.03% to the downside but held at its 10-dma on lighter volume vs. yesterday but still well above average.

 

 

The S&P 500 Index found support at its 200-dma as it sold off 2.59% today on higher volume. The 200-dma can now be watched as near-term support for the S&P, as it could be the dividing line between further downside or a one-off one-day sell-off like we saw last Thursday.

 

 

Meanwhile, the Dow and the small-cap Russell 2000 Index, not shown, remain below their 200-dmas and broke lower today on higher volume as they head for their 50-day moving averages. Today’s sell-off wasn’t too hard to see coming since things were quite extended already and there wasn’t much that looked too appetizing over the weekend. It’s now a question where this goes from here.

The big-stock NASDAQ names have been carrying the market higher, but today the Fantastic Five were all hit with heavy selling. Apple (AAPL), Amazon.com (AMZN), and Microsoft (MSFT) all remain well above their 10-day moving averages and may very well test them soon enough.

Meanwhile, Facebook (FB) and Alphabet (GOOG) both closed just below their respective 10-day lines. This can be watched for the possibility that they are initial signs of failure in their patterns, although it is still early. No doubt, however, if the NASDAQ continues to correct, it will likely be because these five names are also starting to come loose.

 

 

Precious metals came off slightly today, but not before Sprott Physical Gold Trust (PHYS) and other gold ETFs like the SPDR Gold Shares (GLD) broke out to fresh seven-year highs. The PHYS closed flat on the day while the GLD was down slightly as gold futures dropped a little over six bucks to 1775.60/oz.

Pullbacks into the rising 10-dma or 20-dema would offer lower-risk entries from here. The 50-dma in that case could be used as a maximum selling guide.

 

 

Silver futures made a brief appearance above the $18/oz. level before backing off today. The Sprott Physical Silver Trust (PSLV) was buyable last week, however, when it posted an undercut & rally (U&R) move through the prior 62.22 low and off the 200-dma. Today’s pullback brings it into a potentially lower-risk buy area along the 20-dema while using the line as a selling guide for shares purchased at these levels.

One thing I’m watching out for here is whether precious metals hold up in the event of a sell-off in stocks or whether they come down with them. Today’s action looked like knee-jerk profit-taking amid a sharp general market sell-off, so was inconclusive in my view.

 

 

Netflix (NFLX) is playing out as a double-top short, which I discussed as a potential resolution to the current action that one could stalk on the short side. If it can hold near-term support at the 10-dma and 20-dema it could offer a lower-risk entry possibility.

Otherwise, if it busts the 10-dma/20-dema confluence within the context of a continued general market sell-off, it would transpose into a short-sale entry at that point. This would be based on a possible late-stage, failed-base (LSFB), short-sale set-up once the 20-dema is broken.

 

 

Tesla (TSLA) failed at the $1,000 Century/Millennial Mark today in more decisive fashion, slashing below its 10-dma in the process. This triggered the stock as a short-sale entry once it broke below the $1,000 level, and then again when it broke below the 10-dma.

It is now looking like it is headed for a meet-up with the 20-dema, where it could offer a lower-risk entry. However, right now it’s in play as a possible Punchbowl of Death (POD) short-sale set-up where a breach of the 20-dema would help to confirm the potential POD set-up.

 

 

Advanced Micro Devices (AMD) is playing out as a late-stage, failed-base, short-sale set-up after failing to hold support at the 50-dma. As I discussed watching for over the weekend, the stock triggered as a short-sale when it breached the 50-dma this morning. It then broke below the $52 price level where it undercut the prior 52.11 low of June 12th and bounced slightly.

This could keep going lower, but I would watch for any rally back up toward the 50-dma as a fresh short-sale entry possibility.

 

 

When we group AMD with its semiconductor cohorts from recent reports, we can see mixed action.

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), Nvidia (NVDA), and Qualcomm (QCOM) all found support along their 10-dmas, which could bring them into lower-risk long entry positions.

If they breach their 10-dmas and/or 20-demas, they could trigger as short-sale targets. This is what happened to Micron Technology (MU) and Western Digital (WDC) yesterday when they dropped below their 10-dma and 20-dema, triggering as short-sale entries at that point.

MU then broke below its 200-dma to trigger a new short-sale entry today. WDC, meanwhile, broke below its 50-dma today, also triggering a fresh short-sale entry at the line. Now watch for weak rallies into the 200-dma for MU and the 50-dma for WDC as potential short-sale entry opportunities from here.

 

 

My guess is that if the market continues lower you will see AMAT, NVDA and QCOM potentially break near-term support along their respective 10-dma and 20-dema.

Slack Technologies (WORK) changed character very quickly as it broke below its 20-dema today on heavy selling volume. This triggers again as a potential LSFB short-sale set-up using today’s breach of the 20-dema as a short-sale entry trigger. It closed between the 20-dema and the 50-dma, and can be watched for weak rallies back up into the 20-dema for short-sale entry possibilities from here.

An alert, opportunistic short-seller might have come after the stock along the five-day price range highs around 34.50, using the 620-chart to time an entry this morning. That would have given any short play here more juice on the downside as the stock plummeted lower.

 

 

I can divide up the six cloud names I’ve discussed in recent reports into two groups – the strong trenders and the inconsistent floppers. The trenders have been CrowdStrike (CRWD), DocuSign (DOCU), Zoom Video Communications (ZM), and ZScaler (ZS). They all continue to act well, but at least three may be wobbling here.

CRWD found support at the 10-dma and the $100 Century Mark today, which remains critical near-term support for the stock. If it breaches both the Century Mark and the 10-dma then it could trigger as a short-sale at that point.

DOCU has been streaking higher ever since it was announced that it would be added to the NASDAQ 100 Index effective this past Monday. It may finally be running out of steam here on an outside reversal to the downside that came on above-average selling volume today. A breach of the 10-dma can be watched for as a possible short-sale trigger within the context of a continued market correction.

ZM continues to make new highs on light volume, and as of yet shows no signs of abating. ZS, on the other hand, failed on a re-breakout attempt but remains above the 10-dma and the $100 Century Mark. In this position, right at the 10-dma, it could offer a lower-risk long entry possibility, but a break below the 10-dma might spell trouble for the stock and potentially transpose it into a short-sale target at that point.

 

 

Citrix Systems (CTXS) reversed at its 50-dma today, triggering a short-sale entry at that point. Over the weekend I noted the big-volume reversal off the range highs on Friday. This was followed by a short bear flag formation before CTXS broke to lower lows today on increased but light selling volume.

Rallies back up toward the 50-dma from here may offer fresh short-sale entry possibilities. CTXS is starting to evolve as a potential late-stage, failed-base (LSFB), short-sale set-up now that it is failing below the 10-dma, 20-dema, and now the 50-dma.

 

 

RingCentral (RNG) reversed badly today near the range highs on heavy selling volume. If one was stalking this along those highs one might have been able to pick off a short-sale entry using the 620-chart. It then broke below its 10-dma and 20-dema but held support near its 50-dma.

From here, we would look for rallies up into the 20-dema as potential short-sale entries using the line as a tight covering guide. RNG has shown a tendency to obey the 50-dma as it has done several times before since March

 

 

Bill.com (BILL) pulled into its 10-dma today on declining volume today, putting it in a potentially lower-risk long entry position using the 10-dma or 20-dema as selling guides. That said, watch for a breach of the moving averages as potential short-sale triggers within the context of a continued general market pullback/sell-off.

 

 

CloudFlare (NET) was a wonderful long set-up for us last week, but the move finally ran out of momentum on Friday as it reversed off its highs on heavy selling volume. It is now pulling in to test its 10-dma as volume recedes, so we can watch to see whether this presents a lower-risk long entry near the line.

Otherwise, a breach of the 10-dma could indicate a deeper pullback is in store for NET. My tendency is to think that most of the juice is out of the lime on this one, since strong upside moves in this market tend not to result in immediate and further upside.

 

 

Shopify (SHOP) is having some issues clearing its $900 Century Mark. It stalled yesterday after clearing the mark on Monday, and today closed at 897, just below on increased selling volume. The close was inconclusive, however, since the stock traded in a 6% range and closed right smack in the middle.

So, was it supporting action, or resistance at the Century Mark? In this position, I would tend to want to short it here using the $900 price level as a covering guide, but only within the context of a continued market sell-off. Otherwise, if the market finds its feet and takes off again, SHOP could trigger as a long entry at the $900 level based on Livermore’s Century Mark Rule for the long side. A 360-degree situation at a critical Century Mark.

 

 

Enphase Energy (ENPH) is consolidating just under the 10-dma after rebounding from last Wednesday’s big price break on heavy volume. That led to a move back up into the 50-dma Friday where the stock offered a new short-sale entry opportunity as it ran into resistance and reversed at the line.

ENPH is now bumping up against the 10-dma, which might serve as near-term resistance and thus a potential short-sale entry. That is possible if one uses the 10-dma as a tight covering guide, but I would prefer to look for the more opportunistic entry on any retest of and rally up to the 50-dma that again fails.

 

 

ENPH’s cousin, SolarEdge (SEDG) closed one penny above its 10-dma after finding support at the 20-dema. I would watch this for a clean break below the 20-dema as a possible short-sale entry in a big v-shaped punchbowl type of formation similar to what ENPH formed before it came apart a month ago.

 

 

Alpha Pro Tech (APT) continued its blistering move this week as it cleared the $20 price level today but stalled to close mid-range. From trough to peak however, following its proper entry at the 50-dma last Wednesday, the stock posted a 53.61% move in just five days. Nice work if you can get it, and we certainly got it.

 

 

Three of the other four Covid-19 related names I discussed in my weekend report have all jacked higher this week. BioNTech (BNTX) had a big move on Monday before backing down to the 10-dma and offering a second entry opportunity at the line this morning. It is now back to being extended.

Inovio Pharmaceuticals (INO) launched higher yesterday on news it had received government funding for its vaccine and is now way out of range. But it was buyable along the 10-dma and 20-dema last week and proves the utility of operating according to the principle of “buy it when it’s quiet.”

Moderna (MRNA) is the only one of the three that hasn’t moved, but it continues to track tight sideways along its 10-dma and 20-dema. Look for intraday pullbacks to the moving averages as potential lower-risk entries while it’s still quiet.

Over the weekend I insulted Sorrento Therapeutics (SRNE) as perhaps not being able to go anywhere pending a large stock shelf-offering it had filed for in April. The stock decided to prove me wrong by gapping up and moving toward the highs of its six-week price range on a strong gap-up pocket pivot move. Again, the rule here would have been to buy it when it’s quiet.

With new Cov-19 cases rising, the spotlight is once again on these names. Other names in my custom Cov-19 “sector” like Quidel (QDEL) and Novavax (NVAX) which I have also discussed extensively in my video reports have also seen strong moves over the past week or so. If the market sells off further, we’ll get a chance to see how well these Cov-19 names can hold up.

 

 

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.

Things looked troublesome to me last week, as noted in prior reports, but the market shook all that off and sent the NASDAQ Composite and NASDAQ 100 to all-time highs above their respective 10,000 levels to start the week off. But now some of that troublesome action may be starting to percolate into something more serious on the downside.

If not, then perhaps we’re looking at another one-off sell-off like we saw last Thursday. The best way to approach things, therefore, would be to have a handful of names you are monitoring on both the long and short side (sometimes both!) and being ready to move with them depending on how the general market plays out from here.

If one has long positions that have done well, then simply use the Seven-Week Rule to determine your selling guides in case things worsen. In essence, have your action watch lists for both sides of the market ready, and be prepared for anything.

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.