The Gilmo Report

June 9, 2021

June 9, 2021 7:07 pm ET

All eyes will allegedly be on the latest Consumer Price Index report slated to be released tomorrow morning, exactly one hour before the opening bell. Expectations are for a hot 0.4% to 0.5% monthly number which, for those able to multiply, figures out to 4.8 to 6% annualized inflation. How the government calculates inflation, however, has been a sleight-of-hand trick since the Reagan years as the CPI calculation has been revised at least a couple of dozen times since then.

If the government calculated inflation the way it did in 1970 or 1980, or even 1990, it would be much higher. For example, using the 1990-era CPI calculation, the lowest of the three, then 2020 annual CPI was 8.9%. Using 1970 or 1980 methodologies sends the CPI into the double-digits. This is, of course, no secret to anybody who has to pony up to pay for price increases in food, medical care, housing, etc. for some time, and we can see in the St. Louis Fed’s CPI chart below that the CPI has been accelerating since the lows of last year.

 

 

The easy conclusion to reach is that if we see the CPI come out stronger than expected tomorrow, then market rates like the 10-Year Treasury Yield ($TNX) will rise and stocks will tank. That’s certainly one scenario to prepare for, and perhaps the likely one. But I would also be alert to a resolution whereby the market sees a hot inflation number as the last of the inflation spikes with the expectation that inflation will not prove to be transitory as the Fed has promised us.

This would also be a case of the market again climbing the now proverbial Wall of WTF. The bottom line is that we should assume nothing, as I am fond of saying, and stick with what we are seeing on the charts. As we know, actionable set-ups on the charts have mostly been of the swing-trading variety, as this remains a market distinctly lacking in any substantial intermediate-term trends for position-building investors.

The NASDAQ Composite has continued to push closer toward its prior highs but fell short today, stalling and reversing to close in the red after a gap-up open. Volume was lighter than yesterday’s levels but well above-average, so still heavy. This action feels heavy to me, but this market has a way of contradicting the obvious, and the resolution, one way or the other, to this current double-top situation may come after tomorrow’s CPI number.

 

 

The S&P 500 Index hasn’t been able to make much progress beyond the 4200 level and today was more of the same. The index start the day on the upside but eventually turned negative on higher volume. It remains firmly nudged up against its prior highs in a double-top type of formation that has yet to resolve.

 

 

The CPI number may have a tangible effect on precious metals prices, but there are at least four permutations that I can think of. Higher inflation and higher interest rates are likely a positive if real interest rates, which are already negative, remain so. Higher inflation and lower interest rates would be nirvana for precious metals, in my view, while lower inflation with lower interest rates might be a milder positive, and lower inflation with higher interest rates perhaps negative for PMs.

While all of that is certainly a mouthful, it all boils down to one thing: Just watch the charts. I can’t say that the charts of the precious metals complex, including the metals and their related stock cohorts, are necessarily offering any overwhelming clues. Both the Sprott Physical Gold Trust (PHYS) and the Sprott Physical Silver Trust (PSLV) are consolidating their prior strong uptrends off the late-March and early-April lows where they posted actionable undercut & rally (U&R) long set-ups at that time.

Last week they both dropped below their 10-day lines and are currently attempting to hold support at or above their 20-demas. Both, however, have run into resistance at the underbelly of the 10-day line, and the action seems to speak to more consolidation coming. For the PSLV, last week’s U&R at the 9.77 price level would serve as a selling guide, while one could consider the 20-dema as key support for the PHYS.

 

 

Among gold-related stocks, Franco-Nevada (FNV) is the clear leader with a big-volume flag breakout today while Agnico Eagle Mines (AEM) is pulling into critical support along its 200-day line. This provides a lower-risk entry spot using the 200-dma as a tight selling guide. Kirkland Lakes Gold (KL) looks less attractive as it reverses along its 10-dma while Newmont Corp. (NEM) is now living below its 20-dema.

Outside of FNV, the action overall among the gold stocks leaves much to be desired. However, these names may find better direction tomorrow after the CPI number, but which direction remains an open question.

 

 

Gatos Silver (GATO), and MAG Silver (MAG) have the best upside trajectories of any silver miners that I follow and remain extended. First Majestic (AG) is coming into critical support at its 20-dema, which can initially be treated as a lower-risk entry spot. If it fails and busts 20-dema support, then I might be bold enough to short it at that point.

Coeur Mining (CDE) was looking a bit dumpy on Monday but suddenly sprang to life yesterday to post a pocket pivot coming up through its 20-dema. That was also a U&R (look closely at the chart) on Monday as it dropped below the prior 9.72 low of May 20.th It then rallied back above as it also bounced off the 50-dma, so it was possible to act on that as a long entry if one was monitoring the stock.

 

 

Industrial metals are a mixed bag, but the action among all of these remains range-bound where they can become buyable along near-term support. In the group chart below, we can see that U.S. Steel (X) found support at its 20-dema yesterday before rallying to post a pocket pivot at the 20-dema. News that the U.S. and E.U. would remove steel tariffs on each other sent most steelmakers higher yesterday.

Cleveland-Cliffs (CLF) was a variation on a similar theme, finding deeper support at its 50-day line before bouncing to produce a single five-day pocket pivot which then led to a big upside jack today right up to the early-May highs. While this is a base breakout, it’s coming straight up from the bottom of the pattern. In fact if one was going to get long CLF, the time to do it was yesterday on the pocket pivot (look closely at yesterday’s action on the chart).

Alcoa (AA) and Freeport-McMoRan (FCX) are both now below their 10-day and 20-day lines and looking a bit sick. AA did find support yesterday near its 50-dma, and rallied but closed back below the 20-dema today. FCX meanwhile looks more like a short here using the 20-dema as a covering guide. Both stocks are well off their recent highs, so not necessarily what I would consider optimal shorts, however, since they are in one-week downtrends.

 

 

I’ve also got my eye on agricultural commodities, which are certainly beneficiaries of inflation, but are also beneficiaries of scarcity as global populations grow. We often think of the inflation factor as perhaps the only one at play in general price inflation. We should also consider the role of scarcity with respect to its influence on the price performance of food commodity vehicles like the Teucrium Corn ETF, the Barclays Bloomberg Coffee ETF (JO), the Teucrium Soybean ETF (SOYB) and the Teucrium Wheat ETF (WEAT).

CORN and SOYB are both probing new-high territory and are extended. JO is pulling into the region between its 10-dma and 20-dema and looks interesting as a long here while using the 20-dema as a selling guide. WEAT is sitting right at its 20-dema, so is in a long entry position using the 20-day line as your selling guide.

 

 

Fertilizers are steadily being weeded out, forgive the pun, as we’ve seen Intrepid Potash (IPI) break down several weeks ago. Now, Mosaic (MOS) is steadily coming unraveled after announcing it would shut down two potash mine shafts on Friday. If you were watching this yesterday, it triggered as a short-sale entry at the 20-dema and headed lower again today as it appears set for a test of its 50-dma.

CF Industries (CF) is holding support at its 10-dma as it shows four days of tight closes. It acts constructively and has looked buyable along the 10-day line so far. It may soon attempt to join Nutrien (NTR) in new 52-week high price ground.

 

 

As I discussed in recent reports, including yesterday’s GVR, I’m focusing on homebuilders and semiconductors as potential short-sale targets. These have been leading groups that lately have fallen into some disrepair, with several leading homebuilders starting to show concrete signs of late-stage or later-stage failed-base types of short-sale set-ups while semiconductors are mostly rallying up into potential areas of resistance.

Sure enough, all four of the names discussed in my weekend report, D.R. Horton (DHI), Lennar Corp. (LEN), Pulte Home (PHM) and Toll Brothers (TOL), broke down from resistance at various moving averages today. DHI and LEN peeled away from their 10-day lines on the downside while PHM pulled an outside reversal along its 10-dma and 20-dema and TOL pulled its own outside reversal at the 20-dema.

Obviously, one would have had to be stalking DHI and LEN on the short side as they ran up against near-term resistance at their 10-day lines, but both PHM and TOL were actionable today as they flipped out at their 20-day lines. In any case, today’s action confirms my suspicions over the weekend and previously. We’ll see whether these develop into deeper breakdowns from here, which is possible if tomorrow’s CPI hints at higher interest rates to come.

 

 

Semiconductors have recently been pushing back up toward the highs of the patterns, but while bullish charts morph into bearish charts. A great example is found in the one semiconductor I discussed in my weekend report, Brooks Automation (BRKS). This looked like a very nice, subtle pocket pivot last Friday, but it quickly morphed into a short-sale target today with short-sale entry triggers at the 20-dema and then the 50-dma before closing just below the 50-day line.

This would remain a short-sale target here with the idea of entering as close to the underbelly of the 50-dma. The 50-day line then becomes your first potential covering guide with the 20-dema just above as an alternate depending on your risk preference.

 

 

BRKS broke down in synchrony with its semiconductor equipment manufacturing cousins, Applied Materials (AMAT), KLAC Corp. (KLAC) and Lam Research (LRCX). As I’ve noted in recent reports KLAC is the easy short to execute since one simply shorts it as close to the 50-dma as possible, which was possible today, and then uses the line as a covering guide.

AMAT and LRCX are trickier because they are up in double-top areas of their chart patterns but have finally broken below their 10-day moving averages, which they both did in identical fashion yesterday. They briefly rallied this morning but rolled over again, and so have worked as aggressive short entries along the 10-day line. Now we get to see whether they bust the next support level at their 20-day lines, which, if they did, could trigger secondary short-sale entries at that point.

 

 

Micron Technology (MU) is another of a nice chart gone bad. It was hanging tight along its 20-dema on Monday, looking constructive and like it maybe wanted to make a move through its 50-day moving average. On the other hand, we are 360-degree traders, alert to the possibility that what first appears to be a bullish chart suddenly changes personality and morphs into a bearish chart and an actionable short-sale entry trigger.

Yesterday MU gapped up slightly before spinning out in a big outside reversal into the red. It therefore triggered a short-sale entry at the 20-dema (confluent with the 10-dma) and moved lower from there.

 

 

Most semiconductor names were in roll-over mode today, so if you go through the entire semiconductor sector you can find a lot of potential short-sale candidates. A sampling is shown below. Here we have Advanced Micro Devices (AMD) not quite making it up to its 200-dma before breaking back towards its 50-day line. I’m watching for a breach of the 50-dma as a possible short-sale entry trigger.

Qorvo (QRVO) and Qualcomm (QCOM) look quite similar as short-sale set-ups but differ in that QRVO ran into resistance at its 50-dma today while QCOM did so at its 200-dma. Both were shortable today as close to these respective moving averages as possible, which then become covering guides. We’ll see how much lower these can carry from here on the downside, but for now any further rallies into the respective moving averages would potentially offer lower-risk short entries from here.

Texas Instruments (TXN) closed just below its 50-day line today but was a better short near the 10-dma earlier in the day. The close below the 50-dma means we can treat it as a short-sale entry here while using the 50-day line as a covering guide. Again, these are just a sampling of various and similar set-ups among semiconductors, like, for example, AMBA, AVGO, LITE, LSCC, OLED, MCHP, NXPI, SWKS, and WDC.

 

 

Western Digital (WDC) is somewhat more unique in that it is a current base breakout that has failed once and then rallied back to higher highs on very light volume on a re-breakout move. That has since broken down below the 10-day line and WDC today pulled into the 20-dema as volume declined. This may be a lower-risk entry spot using the line as a tight selling guide.

Alternatively, IF we see WDC bust the 20-dema, then it would transpose into a short-sale entry as a late-stage, failed-base (LSFB) type of short-sale set-up. The break at the 20-dema would trigger a short entry and the 20-dema would then become your covering guide, if it occurs, so watch for it.

 

 

Solar stocks have also been a relatively ripe area for short-sale targets, but one has to be opportunistic when looking to short these names.  While all four were looking weak over the weekend, some surprise rallies over the past two days have provided more optimal entries. Enphase Energy (ENPH), First Solar (FSLR) and SunPower (SPWR) all rallied up to their 50-day lines to start the week off but rolled over today where they triggered as short-sale entries, and I alerted members to this earlier today in my blog posts.

SolarEdge (SEDG) rallied up to its 10-dma and 20-dema yesterday and today and failed to hold the moving averages both times. Short-sellers got one more chance today to hit it at the 10-day line, and it reversed from there. These all remain short-sale targets with the idea of continuing to remain flexible with these names as one looks for the opportunistic entries on rallies.

 

 

FOMO continues to be a place where red-hot, high-velocity price moves can be found. I built on this theme in my weekend video report by discussing the stocks with the highest current short interest, many of which can also be found on my list of former FOMO names. Some of the best moves in my FOMO list have come from stocks with high short interest, such as Workhorse (WKHS) (not shown) for example.

Interestingly, the biggest short-squeeze mover this week was also discussed in the weekend GVR, Clovis Health Investments (CLOV). The trick with most of these moves, however, is getting in early rather than chasing the strength once it becomes obvious. If you chase them, then you risk getting caught on a downside reaction move that can have just as much velocity as the upside price move had, as CLOV helps to illustrate.

 

 

Another sizzler is Canoo (GOEV) which I highlighted in a Monday night blog post. The next morning the stock took off, running up 36% in an instant before running into its 200-dma and reversing hard today. I believe they call this type of thing one-and-done, but it was a great high short-interest name to hit for one day’s worth of glory – a timely Monday night blog post.

 

 

Some of the juice is coming out of these lemons, however, as the rallies now get a bit long in the tooth and perhaps too obvious. As I said way back on May 16th when I first discussed former FOMO stocks as possible Ugly Duckling long candidates, these are likely to provide some very nice swing-trading opportunities. But I do not expect these names to return to their full and former glory that we witnessed earlier in the year and in late 2020.

Yalla Group Ltd. (YALA) gave us about 15% or so of upside from its 17.56 U&R long entry point (see the weekend report for details) before running out of steam near its 50-dma. This looks done for now, pending any new set-ups that might show up on the chart.

 

 

Both Snowflake (SNOW) and Unity Software (U) are beaten-down former FOMO names that have rallied since mid-May and were showing some buyable action along their 10-day lines over the weekend, as I discussed in the weekend report. Both stocks then had nice upside moves on Monday but those were one-day wonder moves with no real follow-through.

SNOW has been stalling and reversing off the intraday highs over the past two days while U is just stalling as it tries to move higher following Monday’s decent upside move. I’m certainly not going to go long either of these up here. Yet it may be worthwhile to see how well they test near-term support at the 10-dma for SNOW and the 50-dma for U. If they bust those levels, then they could morph into short-sale targets.

 

 

There were also a couple of contrarian short-sale set-ups I was seeing in currently hot tech names that I discussed over the weekend, and both are starting to work out. Roblox (RBLX) is your textbook failure at the $100 Century Mark so triggered as a short-sale again at the $100 level on Monday. It then reversed and broke down hard, all based on Jesse Livermore’s Century Mark Rule for the short side.

It gave shorts another opportunity to hit it on the short side when it rallied back up through the 10-day line today and then reversed, triggering as a short at that point along the 10-dma. It now looks like it’s headed for a test of the 20-dema, and I would watch for a break below the 20-day line as the next possible short-sale entry trigger point.

 

 

Upstart (UPST) was another one with the idea of looking for a base-failure type of short-sale set-up to emerge as it has been faltering at a recent breakout point. The breakout initially failed last Friday, and one more breakout attempt (a re-breakout, if you will) occurred yesterday before the stock reversed to close in the red.

UPST then triggered an aggressive short-sale entry today at the 10-day line, although those stalking the stock per my discussion over the weekend might have shorted yesterday’s move using the 620-chart to guide an entry. This is now shortable here as close to the 10-dma as possible while using it as a covering guide. A break below the lower 20-dema would trigger a fresh short-sale entry if it occurs, so can also be watched for at this stage of the base-breakout failure.

 

 

Last but not least, I continue to view Tesla (TSLA) as a short-sale target on rallies into the 200-dma, as discussed over the weekend. We saw a nice push into the 200-day line on Monday and then a move above the line yesterday where the stock stalled and reversed to close back below the 200-dma. That as a short-sale entry trigger at that point.

Today TSLA again rallied up into the 200-dma early in the day before reversing to close in the red. This remains a short on rallies into and as close to the 200-day line as possible from here.

 

 

But wait, there’s more! Notice how all these big-stock NASDAQ stocks below look weak and/or extended on the upside. I see Apple (AAPL) being shortable at its 50-dma yesterday and today, Amazon.com (AMZN) shortable at its 50-dma, Facebook (FB) faltering at 10-dma support, Alphabet (GOOG) stalling in an extended breakout position, Microsoft (MSFT) stalling around prior price highs, and Netflix (NFLX) just coming apart after being shortable at its 10-dma today.

If we focus on these names and other key NASDAQ 100 stocks as a group, including TSLA above, then we can discern a rationale for simply doing a blanket short on them all by going long the three-times leveraged ProShares Trust UltraPro Short QQQ ETF (SQQQ) right here and then use the 10.50 level as a tight stop if the general market and big-stock NASDAQ names continue to weaken. Simple enough.

 

 

Will the CPI number tomorrow turn out to be a big nothing burger? That’s possible I suppose, but I can only operate according to the evidence on the ground, that is, the charts. And as this report shows, the short side came into sharp focus today and in some key leadership or recent leadership areas like homebuilders and semiconductors, for example.

While things can change quickly in this market, this is what the charts are showing me right now. And so, the set-ups are pushing me naturally toward the short side. Over the next two days we may see just how significant this turns out to be, if at all. Stay alert.

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.

____________________________________________________________