The Gilmo Report

June 6, 2021

June 5, 2021 3:04 pm ET

The Fed announced on Wednesday evening that it would begin selling the corporate bonds and bond ETFs it bought last year to allegedly keep the corporate bond market functioning. That was taken as a sign that the Fed was doing just a little bit more than thinking about thinking about tapering, and high-PE NASDAQ names were pummeled in response, sending the NASDAQ Composite Index gapping below its 50-day moving average on heavy volume.

Friday’s jobs number came in at 559,000 jobs recovered vs. expectations of 740,000, quickly changing investors’ minds about the whole thinking-about-thinking-about-tapering thing and sending tech/growth stocks back to the upside. And so, the week ended with a shakeout at the 50-day moving average for the NASDAQ Composite, albeit on light volume.

 

 

The S&P 500 Index meanwhile took back the 4200 level on Friday but failed to hold new closing highs as it drifted in slightly into the bell. Volume was light. It’s difficult to conclude, however, that worries about what the Fed is going to do next, particularly to address allegedly nascent inflation that some claim will soon get out of hand, have dissipated entirely. Meanwhile, individual stocks mostly just chop around within their chart patterns, with little that I find compelling for anything more than a swing trade.

 

 

Despite the futures jack at the open on Friday, some of the best initially actionable trades that I found were on the short side, as I blogged early in the day. Stuff stocks like Alcoa (AA), Mosaic (MOS), and U.S. Steel (X), were almost too easy to hit at the open as short-sale targets, and I show the five-minute intraday chart of AA below to illustrate how all three looked right at the open.

All three were slammed right at the open after initially pushing to the upside, and the breakdowns had the usual 1-2 hour window of short-selling glee before bottoming out, posting MACD crosses to the upside, and chopping around for the rest of the day.

 

 

You might think that with the S&P 500 pressing for all-time highs that industrial metals might be lighting it up, but that was certainly not the case as Alcoa (AA), Cleveland-Cliffs (CLF), Freeport-McMoRan (FCX) and U.S. Steel (X) all churned around on their daily charts. AA and FCX are holding support at their 20-demas, so could possibly be viewed as lower-risk long entries here while using the line as a selling guide.

CLF and X are flopping around just above their 10-day and 20-day lines, so would probably be better bought as close to their 20-demas as possible. Again, if we see these names start to bust support at their 10-dma/20-dema confluences, they could easily transpose into short-sale targets at that point. For the most part, however, these are just more sloppy charts in a market mostly filled with sloppy charts.

 

 

One interesting point I’ve noted recently is that despite the immense amounts of dollars that the Fed has printed over the past year or so, Money Velocity remains near zero. The fact is, you can print all the money you want, but if it doesn’t go into the economy and begin circulating, it can’t drive up price levels, at least not in a hyper-inflationary way, as I see it.

The entire inflation-trade argument rests upon the idea of significant inflation taking hold, but how severe it would get while Money Velocity remains at historical lows is a reasonable question to ask. My guess is that severe inflation would likely ensue if we saw Money Velocity suddenly gain traction, but for the entire eleven years since the Fed introduced QE, money velocity has simply continued to slide to absurdly low levels.

 

 

Wednesday’s Fed news sent the dollar shooting higher off its recent lows on Thursday, and precious metals acted predictably by selling off. Note that the steady decline in the dollar over the past couple of months has inversely correlated very nicely with the upside price trends in both gold and silver over the same time period. On Friday, however, the dollar dropped right back to where it was on Wednesday, with little net change for the week.

 

 

As the dollar rose and then fell, precious metals moved in the opposite direction. The Sprott Physical Gold Trust (PHYS) gapped down on Thursday and got close to its 20-dema before rallying off the intraday lows. This is the type of opportunistic pullback I like to see if I’m interested in buying shares of the PHYS. Generally, after a steady uptrend, sharp pullbacks, usually on news, are what create entry opportunities like this. A retest closer to the line would be my most preferred entry, using the 20-dema as a selling guide.

The Sprott Physical Silver Trust (PSLV) also got hit on Thursday but pulled an undercut & rally (U&R) long entry move at the prior 9.77 low of two weeks ago as it recovered off the intraday lows. That’s an easy entry point since one can then use the 9.77 low as a selling guide. Overall, the movement in the PSLV hasn’t been all that extreme within the context of the prior uptrend, and closed Friday right at its 10-dma.

 

 

The Thursday break in gold also brought the gold stocks down, which created some opportunistic entries in the stronger names. Franco-Nevada (FNV) has been one of the strongest gold-related name, if not the strongest, since the late-March lows and it posted the strongest undercut & rally move on Thursday as well. After undercutting the prior 146.33 low, it turned back to the upside and broke out through the trendline highs of its short flag formation on Friday.

Agnico Eagle Mines (AEM) and Kirkland Lakes Gold (KL) are in U&R Land but more simply are just holding support at their 20-demas. These can be viewed as lower-risk entry spots as close to the line as possible. Newmont Corp. (NEM) is in a similar position along its own 20-dema. As long as the dollar doesn’t start jacking again, these should be able to hold support and set up again, but for now just play them as they lie.

 

 

Silver miners broke down on Thursday with the metals, but the action remained sloppy on Friday. Currently the chart patterns of First Majestic (AG), Coeur Mining (CDE), Gatos Silver (GATO), and MAG Silver (MAG) aren’t showing me anything I would consider actionable, but we can continue monitoring these as they potentially attempt to settle down along support levels at their 10-dma or 20-dema.

 

 

Earlier in their moves in 2021 the fertilizers were all correlating quite strongly on their charts. That has now changed drastically as they have all gone their separate ways as of late. CF Industries (CF) has rallied tepidly back up to its prior highs, where it could become shortable, while Mosaic (MOS) split wide open on Friday after announcing it was closing two potash mine shafts. It ended the day just above its 20-dema, where it becomes a potential long entry with the proviso that a breach of the 20-dema would trigger a short-sale entry.

As I’ve noted in recent reports, Nutrien (NTR) is the de facto leader in the group, posting a big-volume buyable gap-up (BGU) move on Friday as it streaked to new highs. It was already moving on Wednesday, and Friday’s BGU was actionable while using the 63.80 intraday low as a selling guide. NTR remains within buying range of that BGU after closing at 64.53 on Friday.

 

 

Oils are mostly trying to consolidate after some sharp moves earlier in the week, but the clear leader, in my view, is the one that I pegged as my favorite in my May 9th report. That would be Bonanza Creek Energy (BCEI) which was pulling into a trendline breakout point at that time and offering a lower-risk along that trendline.

As noted in my Wednesday report, BCEI posted a continuation pocket pivot at its 10-day moving average on Tuesday. It then moved to new four-year highs on Friday as it continues to track higher along its steeply trending 10-day line. Of all the oils I follow, which is a decent number, BCEI is far and away the strongest-trending of the bunch.

 

 

Oils remain something of a news-driven group, and you would think that, with all the Bidenista’s talk of putting the oil companies out of business, that the oil patch would be suffering. Another example of assume nothing. Meanwhile, we’ve seen solar stocks remain down in the dumps with some resuming as short-sale target over the past couple of weeks.

We can see that Enphase Energy (ENPH) and SolarEdge (SEDG) were both recent shorts at resistance along their 50-dmas while SEDG first got a little closer to its 200-dma before rolling over. Along with First Solar (FSLR) and Sunpower (SPWR), these are all now dropping below their 20-demas where they trigger fresh short-sale entries while using the 20-day line as a covering guide.

 

 

The action among individual stocks is in most cases quite trendless, and so I am often reduced to trying to find set-ups in pursuit of the proverbial pulling a rabbit out of one’s hat. Workhorse (WKHS) was one such rabbit as I blogged earlier in the week when it was trading just below $11 and just before it shot up to 18.33 the very next day. But that rabbit has already come and gone, and one either jumped on it when I blogged about it Wednesday during the trading day or you were left behind as it immediately jacked up near the 200-dma.

At that point it shifted into a shortable situation and has since reversed sharply, although this kind of severe price volatility carries higher risks no matter in which direction you attempt to play it. Hunting for stocks like this with huge short interest, like WKHS with 43.1% of the float sold short, is perhaps one of the very few “themes” that attract me these days with respect to any hopes of catching some price velocity.

 

 

Looking for more such rabbits to pull out of the proverbial hat, some of you might remember our old friend Yalla Group Ltd. (YALA), a big winner that I first discussed in my reports back in November of last year when it was at a mere $10 (refer to the November 22, 2020 report).  It eventually went into a climactic move before peaking at 36.60 in mid-February.

Since then, YALA has had its clock cleaned along with all the other FOMO names that topped at around the same time in February. It is now working on a U&R long set-up at the prior 17.56 low of March 5th. It closed Friday at 17.76, so remains within buying range right here while using the prior 17.56 low as a selling guide. Note that volume dried up very sharply on Friday to – 50.7% below average as it tracks along the 10-day and 20-day lines.

 

 

Snowflake (SNOW) is holding up very well following the big upside outside reversal and pocket pivot move it posted after earnings the prior week. Volume dried up to -35% below average, which is the bare minimum decline I like to see for a volume dry-up, or as I more colorfully like to call it, a VooDoo Day.

The stock is holding tight along the 10-dma which puts it in a buyable position using the line as a selling guide. Note that the 20-dema is not that far below where the stock is trading at currently, so given SNOW’s ability to get volatile at times I would also be alert to any pullbacks to the 20-day line as more opportunistic entries with the idea of using the 20-day line as your selling guide in that case.

 

 

Elsewhere in Former FOMO Land I note that Unity Software (U) is showing some of the characteristics that I look for in a deep Ugly Duckling Swamp type of long set-up off of extreme oversold lows. We can see that after a huge upside run that topped last December, the stock has had three identifiable waves of selling (red arrows), with the third wave being associated with the fifth and fattest gray Bingo oversold indicator bar.

U has also recently rallied above a series of lows extending back to early March and has held above the lows as it tracks tightly along the 20-dema. At the same time, we’re seeing volume dry up sharply, so this becomes of interest as a long entry here while using the 20-dema as a tight selling guide. There’s no guarantee it will work, but when looking for deeply oversold Ugly Duckling set-ups, this has all the necessary characteristics.

 

 

Roblox (RBLX) is a cousin-stock to U, and the two companies are considered competitors. We might also note that RBLX stock is doing much better after breaking out over two weeks ago. This was an actionable U&R along the prior April low at 67.30. After several days of consolidating that sharp upside move off those lows, RBLX has shot up another 20% or so.

I’m not necessarily interested in this as a long up here, however, as it is now flirting with the $100 Century Mark. Over the past three days it has run into resistance along the $100 level, and so I have been keener to short it here and then use the recent highs or the $100 level as a covering guide. If it can decisively clear the Century Mark, then perhaps it’s good for a few more points of upside and therefore a long, but for now I think this is an interesting name to keep an eye here as a potential two-sided play along the $100 Century Mark, depending on how it plays out.

 

 

Upstart (UPST) is a recent IPO as a provider of a cloud-based AI lending platform that supposedly enables “effortless credit” while displaying one of the widest-ranging charts I’ve seen lately. This thing swings 50-100% in either direction in just a few weeks, but most recently has pulled off a two-attempt U&R that led to a quick double over the next three weeks. That’s insane price action best suited to those with the proper intestinal fortitude.

On Friday UPST attempted to break out from a 50% deep base formation but reversed badly and closed negative on heavy selling volume. The daily price range was more than 20% wide, so anybody catching this as a short near the highs did well, whereas anyone chasing the breakout didn’t. What else is new.

Is this going to play out as a later-stage breakout failure, or will it hold support, most likely at the 10-dma and attempt to break out again? For those of you who live for wild action, you can consider this as a potential short-sale set-up if it busts the 10-dma but also a potential re-breakout candidate if it can hold near-term support.

 

 

Among big-stock NASDAQ names, I don’t see much that screams at me either way, although lately I’ve noticed that Tesla (TSLA) is acting like it wants to be shorted again. Yesterday it broke below the 200-day line where it triggered a short-sale entry while using the line as a covering guide, but today rallied back up toward the line on lighter volume.

In this position I would first view it as a short as close to the underbelly of the 200-dma as possible while using it as a covering guide. The flip side is that a move back above the 200-dma could trigger a typical moving average undercut & rally, also known as a moving average shakeout, long entry signal. So this is another one that is of interest as a potential two-side play depending on how things develop from here.

 

 

Since very little has changed with the usual gang of semiconductor stocks that I’ve discussed in recent reports, I’m going to focus on a fresher name (at least with respect to its inclusion in my written reports) that is in one of the better long entry positions among the more than 50 semiconductor names that I follow on a day-to-day basis. That would be semiconductor equipment manufacturer Brooks Automation (BRKS).

 

 

A few weeks ago, my dental hygienist told me she was going to get her real estate license so she could “make some money on the side” selling houses in this big housing boom. I of course pointed out to her that for the past few weeks there have been more real estate agents out there than houses for sale. And, as you know, I have been bearish on homebuilders as a result of higher interest rates for some time.

Among the names I’ve discussed in recent reports, the one that was looking the strongest earlier in the week, Hovnanian Enterprises (HOV), very quickly nose-dived and blew apart, breaking over 21% off its peak in just three days. This was breaking out two Fridays ago, but the double-top formation got the better of it and the big bad bear blew HOV’s house apart in short order, with short-sale triggers all the way down at the 20-dema and then the 50-dma as well. Ooof!

 

 

I continue to view the homebuilders as a group ripe for campaigning on the short side, and as we see with the HOV example above, stalking rallies into potentially shortable chart positions is the best approach. Not that it is easy, necessarily, but it does seem to work better than chasing weakness in this group.

Below I show four more homebuilders which show a nice, representative array of potential entries to look for on rallies. D.R. Horton (DHI) and Pulte Home (PHM) were both shorts at prior price highs, therefore price resistance short entries, while Lennar Corp. (LEN) was simply shortable at the 50-day line a few days ago.

Toll Brothers (TOL) is a bit trickier but note how it rallies up into double-top territory where it comes right up into the bottom of a prior gap-down falling window – call it the windowsill. These all illustrate how creativity and the ability to assess where shortable resistance might be found in a group that has likely topped are critical to the short-sale process in this particular environment.

These all remain on my short-sale target list for now. While they are currently a bit extended on the downside after being shortable earlier in the week, watch for any rallies up into near-term resistance, whether at the 20-dema or 50-dma, for example, as potential secondary short-sale points.

 

 

What looked like big trouble for the market on Thursday became another one of these one-day wonder situations where one can score some nice short-sale profits, at least for one or two days, before the market’s severe personality disorder kicks in again. Bearish one day, bullish the next – that’s the character of a trendless market.

Once again, this is not an optimal environment for trend-following investors, so relax and take some summer vacation time. Meanwhile, swing traders can certainly have at it unless and until I see concrete evidence of a major shift in the current market backdrop. Play it as it lies!

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.

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