The Gilmo Report

June 28, 2020

June 27, 2020 10:39 pm ET

Things got rough again for the market on Friday after a brief respite the day before. The indexes ended the week with a big-volume distribution day thanks to Russell Index rebalancing which exaggerated volume levels. Nevertheless, the action for both the indexes and leading stocks wasn’t good.

The NASDAQ Composite Index gave up the 10,000 level, along with the NASDAQ 100, on Friday, closing below its 20-dema on heavy index rebalancing volume. You are now three days off the peak with the 50-dma looming way down below.

 

The S&P 500 Index broke below near-term support at its 200-dma on Friday as index rebalancing sent volume levels skyrocketing. The NYSE-based indexes now sport two distribution days over the past three trading days as they are all below their 200-day lines, including the Dow and the very broad NYSE Composite Index.

 

 

Since the March lows, the indexes have at most come off 2-3 days before turning back to the upside. Heavy selling at times has sent the indexes stumbling backwards, but not for long, as they have quickly regained their footing and resumed stumbling higher, in zombie fashion. We’re now down three days off the peak, so we’ll see whether this zombie-stumble action returns.

Precious metals diverged from stocks on Friday, moving to the upside as equity indexes sold off.  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 also closed on the upside Friday. The iShares Silver Trust (SLV) found support along its 10-dma and 20-dema, which keeps it and other silver ETFs in lower-risk entry positions using the 10-dma/20-dema confluence as a selling guide for shares bought at current levels.

Silver’s move has been going for some time now off the March lows. It caught some momentum in mid-May when it posted a pocket pivot at the 50-dma after a one-month consolidation. Now the SLV is in another one-month consolidation and I’m looking for a potential breakout from here if it continues to hold support along the 10-dma/20-dema confluence.

 

 

I’m often asked about gold and silver stocks, and my general view about the space is that I’d rather own gold and silver more directly. If you compare the group chart of four of my favorite precious metals stocks, Agnico-Eagle Mines (AEM), Franco-Nevada (FNV), Pan-American Silver (PAAS), and Wheaton Precious Metals (WPM) to the charts of the GLD and SLV, the first thing you’ll notice is that GLD and SLV have held up much better since mid-May.

Metals-related stocks have been correcting well off their mid-May highs and building bases since then.  The four I show below are all trying to come up the right sides of potential new bases and all four were up on Friday when the general market was down. This demonstrates to some extent the relative outperformance of the metals vs. metals-related stocks, and why I prefer to buy vehicles closer to the metals themselves.

One of the divergences that I’m looking for here is to see gold and silver rally or hold up well as stocks sell off. Meanwhile, I tend to view metals-related stocks to be vulnerable to the fact that they are stocks and could sell off in a severe forced-selling episode. But then, so could the metals themselves as everything gets sold in a rush to liquidity.

And that is why I’m very interested in seeing how the metals, and even the metals-related stocks, act during any deeper stock market correction/pullback. With $18 trillion in additional global stimulus hitting the markets in 2020, I wonder whether an impending massive devaluation in global fiat currencies will create demand for alternative-currencies like silver and gold that keeps the metals and those who produce and own them (e.g., metals-related stocks) moving higher, even amid a general market correction.

Theoretically, metals-related stocks tend to provide leverage with respect to a move in the metals themselves. This is an interesting proposition in an environment where gold and silver prices could move significantly higher, which is what they look like they want to do.

The charts of metals-related stocks below look constructive, and we’ll see if this is presaging further upside as they set up along key support levels. Nothing is certain, of course, but this will all be interesting to watch to see how it plays out from here.

 

 

The Fantastic Five, Apple (AAPL), Amazon.com (AMZN), Facebook (FB), Alphabet (GOOG) and Microsoft (MSFT), were all hit hard on Friday. The action ranged from slides below the 10-dma to full-blown price breaks through multiple support levels.

On the group chart we can see that AAPL and MSFT both closed just below their 10-dmas. One could treat these as early short-sale entries using the 10-day lines as tight covering guides. That would be something for aggressive short-sellers (like yours truly) to consider.

Meanwhile, AMZN closed right at its 10-dma, while GOOG and FB were slammed through their 20-demas and then their 50-dmas on relatively steep declines. Rallies back into their 50-dmas in either one could offer secondary short-sale entries using the 50-dmas as covering guides. But an alert short-seller should have hit these as soon as they busted their 10-dma and 20-dema on Friday.

 

 

Things weren’t looking too good on Friday for the Fantastic Five alone as big-stock NASDAQ names took it on the chin across the board. Netflix (NFLX) broke below its 10-dma and the prior base breakout point on Friday, triggering as a short at that point. It ended the day right at its 20-dema on higher selling volume.

In this position, now that the prior breakout has failed, the possibility of a late-stage base-failure comes into play. If NFLX breaks below its 20-dema within the context of more general market selling this week, then it would trigger a secondary short-sale entry at that point.

 

 

Tesla (TSLA) again ran into resistance at the $1,000 Century/Millennial Mark Friday as buying interest remained weak after testing the $1,000 level early in the day. It then reversed to close near its 20-dema. This puts TSLA in a position where a break below the 20-dema would serve as a secondary short-sale entry trigger (the first being at the $1,000 level on Friday) using the 20-dema as a tight covering guide.

 

 

On the macro-side we remain cognizant of the fact that TSLA has formed a large punchbowl formation on its weekly chart where resistance has consistently been found around the Millennial mark. This punchbowl would turn into a Punchbowl of Death (POD) short-sale set-up once the stock breaks the 20-dema on the daily chart, so that remains something to watch for.

 

 

Semiconductors were slammed on Friday after starting to look a bit wobbly on Wednesday. The six that I’ve followed in recent reports, Applied Materials (AMAT), Advanced Micro Devices (AMD), Micron Technology (MU), Nvidia (NVDA), Qualcomm (QCOM) and Western Digital (WDC) are shown below in various states of disrepair.

AMAT has closed just below its 20-dema, which may trigger the stock as a short-sale entry here using the line as a covering guide. AMD has split wide open since its initial short-sale entry at the 50-dma on Wednesday, while MU has dipped below its 200-dma where it sits in a short-sale entry spot using the line as a covering guide.

NVDA found support at its 20-dema on Friday, but if it breaks below the line then it may begin to play out as a late-stage, breakout failure, short-sale entry. QCOM is wobbling back below its 10-dma but could also trigger a short-sale entry on any break below the 20-dema. Finally, WDC slid to lower lows on Friday after breaching the 50-dma on Wednesday.

On Thursday all these semi names except AMD tried to hold support on small bounces. But those bounces gave way to further downside on Friday as the group weakens further. Certainly not a constructive sign for the general market.

 

 

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-dmas and 20-demas. If so, they would trigger as short-sale entries at that point, which can be watched for.

Slack Technologies (WORK) stalled along its 20-dema on Friday, closing just below the line on heavy volume. This puts the stock in a short-sale entry position here just below the 20-dema while using the line as a tight covering guide. Because the stock is flopping around on either side of the 20-dema, this remains a fluid situation where the optimal short-sale entries occurred along the range highs closer to 35, so play it as it lies.

 

 

CrowdStrike (CRWD) broke below its 10-dma and the $100 Century Mark on Friday. This triggered the stock as a short-sale entry at the 10-dma and then the Century Mark. It found support at the 20-dema on Friday but closed at 98.79, just over 1% below the Century Mark.

This keeps the stock in a short-sale position using the $100 Century Mark as your covering guide. However, I’d also watch for any weak rallies back into the 10-dma as lower-risk short-sale entries above the $100 level that would certainly have the potential to reverse back below the Century Mark.

 

 

ZScaler (ZS) reversed back through its 10-dma as its prior flag breakout wavers. Volume was heavy but the stock held above the 20-dema and the $100 Century Mark. It can initially be treated as a short-sale here based on the breach of the 10-dma and a flag breakout failure using the 10-dma as a covering guide.

A breach of the 20-dema and the $100 Century Mark can then be watched for as a secondary short-sale entry event if it occurs.

 

 

DocuSign (DOCU) and Zoom Video Communications (ZM) remain in persistent uptrends, but I would watch both for breaks below their 10-day moving averages as possible early-bird short-sale entries. This would have to come within the context of a continued market correction, however.

 

 

Citrix Systems (CTXS) has rallied back up into its 50-dma, which puts it in a lower-risk short entry position using the line as a covering guide. RingCentral (RNG) continues to confirm its status as a somewhat bi-polar stock, going down big on volume Wednesday before going up big on volume on Friday in a stalled breakout attempt.

While RNG is a bit moody, the main point that can be considered from the chart is that this is a stock that one handles in a contrarian manner. Support near the lows becomes buyable, while resistance near the highs, right here, may become shortable. Thus, one to stalk on the short side along its range highs within the potential context of a continued market sell-off.

 

 

Smaller cloud names Bill.com (BILL) and CloudFlare (NET) continue to hold up well. BILL moved to higher highs on Friday while NET is pulling into its 10-dma where it found support on Friday. Of the two, only NET would be a potentially buyable position at the 10-dma while using the line as a very tight selling guide.

I would make the point, however, that given how extended NET is, the 20-dema may be a better, more opportunistic reference for a possible lower-risk entry. In this environment, if we see further general market selling, it’s likely that the 20-dema would come into play as near-term support for NET.

 

 

Shopify (SHOP) closed Friday above the $900 Century Mark after a brief visit below earlier in the day. Technically, this remains in a long entry position based on Livermore’s Century Mark Rule on the long side using the $900 price level as a selling guide. Otherwise, failure at the $900 would cause SHOP to transpose into a short-sale target based on Livermore’s Century Mark Rule in Reverse for the short side.

 

 

SolarEdge (SEDG) finally followed in the footsteps of its cousin Enphase Energy (ENPH) by starting to play out as an initial, potential Punchbowl of Death (POD) short-sale set-up. This possibility was confirmed on Thursday when SEDG broke below its 20-dma where it triggered a short-sale entry just below the line at the open.

From there it slashed lower before meeting up with support at its 50-dma on Friday. Bounces back up closer to the 20-dema from here can be watched as possible short-sale re-entries. Otherwise, if SEDG breaks below the 50-dma, that then triggers another short-sale entry at the line while using the line as a covering guide.

 

 

Enphase Energy (ENPH) keeps running into resistance along the descending 10-dma, so one could look to short the stock here using the 10-dma as a covering guide. In that case you are looking for a quick move lower, perhaps down to the prior June low and the 200-dma.

Otherwise, one could watch for any rally up closer to the 20-dema or 50-dma as more opportunistic short-sale entries. Either way, ENPH remains a POD that is in play on the short side for now, with the only issue being where and when it offers the most optimal short-sale entries now that it is well off its prior price highs.

 

 

Both ENPH and SEDG are POD types of short-sale set-ups in varying stages of development. ENPH is now six weeks down off its peak. Notice how its break occurred on a rapid about-face in new-high price ground, giving it a straight up and straight down look.

SEDG, on the other hand, has spent a couple of weeks consolidating along new highs before breaking sharply to the downside this past week on heavy volume. A lot of patterns look like this, and these patterns in turn imitate the action of the major market indexes on their respective weekly charts.

 

 

Friday’s Russell Index rebalancing sent exchange volume skyrocketing higher and had some interesting effects on certain stocks and groups. I noted that the three big-stock video-gaming names, Activision Blizzard (ATVI), Electronic Arts (EA), and Take-Two Interactive (TTWO) all posted pocket pivots on Friday, a day where the NASDAQ exchange saw 2,451 stocks decline while only 553 rose.

It’s quite possible that these pocket pivots in the video-gaming groups were caused by the rebalancing, so it will be interesting to see how these play out. Note that all are in positions where they’re just above or just approaching breakout points and hanging along their 10-day moving averages. Do these pocket pivots indicate further upside, or are they one-day wonders that will soon see these names break below their near-term moving averages and transpose into short-sale targets in any continuing market correction?

Video-game sales have been increasing sharply lately thanks to the whole stay-at-home theme, but if the overall economy does not return to normal soon, or returns to a decidedly less-than-normal “new normal,” will consumers continue to spend on discretionary items? My guess is that they won’t, and the action of these stocks will be something to watch for clues with respect to how this theme plays out in a continued Covid-crippled economy.

 

 

Last weekend I put out five Covid-19 related names that were setting up, and four of the five had sharp upside price moves this past week. Alpha Pro Tech (APT), BioNTech (BNTX), Inovio Pharmaceuticals (INO) and Sorrento Therapeutics (SRNE) all shot higher this week, but one had to employ the axiom of buy it when it’s quiet.

The moves have been sharp but ran out of steam later in the week except for BNTX which broke out to all-time highs. Meanwhile, SRNE failed to hold the $6 intraday low of Thursday’s buyable gap-up (BGU) move but hung in relatively close, closing Friday at 5.87 after coming within two cents of completely filling the prior gap-up rising window. This may put it in a gap-fill buy zone using the 5.61 low of the rising window as a selling guide.

 

 

With the other four having sharp moves this past week, this leaves Moderna (MRNA) as the disconnected child. Instead of moving higher, it moved lower on heavy selling Thursday, perhaps because other Covid-19 related names were getting all the good press.

But MRNA found intraday support along the 50-dma on Thursday, where it also held on Friday as volume dried up to -41.8% below average. One could take the opportunistic approach here by using this as a lower-risk entry with the 50-dma as a tight selling guide.

 

 

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. Fortunately, these names have mostly benefited from positive news this past week.

In any case, 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.

What looked troublesome by Wednesday has become even more so as the indexes and leading stocks start to come off their recent highs. Again, review your selling guides based on whatever trailing and absolute stops you have set for your existing positions, or refer to the Seven-Week Rule as appropriate.

Whether this current sell-off from the latest highs in the major market indexes turns out like the other 2-3 day breaks we’ve seen all the way up since mid-March is unclear. If it doesn’t, then we are obviously looking at a deeper correction, and we’ve already seen some short-sale set-ups begin to play out. The situation is extremely fluid right here, right now so stay alert and be prepared to act as appropriate before anything hits the proverbial fan.

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 no positions, 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.