The Gilmo Report

March 11, 2020

March 11, 2020 3:26 pm ET

The market has been reduced to a surreal game of “guess the gap” where huge overnight futures moves are the order of the day. After the NASDAQ Composite Index found support at its 200-dma on Friday while sentiment indicators spiked to extreme fear levels, it looked like we might be headed for an oversold bounce to start the week off.

 

 

But the market instead chose to make history with a 2,013.76-point Dow decline on Monday – a real “Gotcha!” moment after Friday’s action. It followed up on Tuesday with a whipsaw day of epic proportions that saw the Dow open up over 900 points, then reverse over 1,000 points to the downside before finally reversing once more and jacking higher to close up 1167.14 points.

 

 

How do you trade this? Simple answer: For the most part, you don’t. Unless you can navigate the extreme intraday volatility in rapid-fire day-trading style or unless you can correctly predict the direction and magnitude of the overnight gap, you’re better off sitting in cash. Only nimble, experienced and courageous day-traders and swing-traders need apply.

If there is such a thing as a playable trend in this market, perhaps we will eventually find it in precious metals. The Fed is widely expected to lower rates again when it meets next week, but in the meantime has expanded its overnight report operations in the wake of last week’s emergency 50-bps rate cut.

My own expectation is that the Fed will soon go to zero, and also announce a new formal round of QE, instead of the “it’s not QE” they’ve been pouring into the repo markets. This remains bullish for gold and silver, but in the short-term they become fungible sources of liquidity to meet margin calls when the market is in free-fall.

Thus, we look for the opportunistic entry in the expectation that we will see some sort of breakout in relatively short order. The SPDR Gold Shares (GLD) posted an eight-year closing high on Monday, but forced selling is likely weighing on the yellow metal over the past two days. In the process, watch to see how this current test of the 10-dma and 20-dema plays out as a potentially lower-risk entry opportunity on the pullback.

 

 

The iShares Silver Trust (SLV) failed to hold its 200-dma, so will need to show me a new long set-up, perhaps on an undercut & rally move lower in its pattern. The wild card here is that the white metal is also an industrial metal, and as the global economy comes under pressure this serves as a strong mitigating force against silver’s status as an alternative currency.

Right now, this is leading to a lot of choppy action as the SLV remains within what is now a re-test of its 200-dma on Friday. Given gold’s primary status as an alternative currency, right now I favor the GLD and am focused on looking for lower-risk, opportunistic entries there.

 

 

At this point, most stocks have been beaten to a pulp. The only thing one can do now is play continuation short-sale set-ups. That is simply the idea of shorting stocks in downtrends when they bounce and rally up into resistance. The other option is to hunt for stocks rallying for some ridiculous reason.

Last week we saw Zoom Telecommunications (ZM) and Slack Technologies (WORK) rallying on the idea that COVID-19 would force the world to use their products as companies implement work-from-home (WFH) policies. That theory has helped drive in buyers who in turn have set up both stocks as short-sale targets over the past several days.

ZM remains a potential Punchbowl of Death (POD short-sale set up as it bounces between its 10-dma and 20-dema. Over the past three days the 10-dma has served as shortable resistance, but the stock has yet to bust its 20-dema. A breach of the 20-dema would confirm this as a new short-sale entry at that point.

Otherwise, one could continue to take the opportunistic approach of shorting into rallies while using the 10-dma as a covering guide.

 

 

For the purposes of clarity, we can see the big punchbowl formation in ZM on the weekly chart below. Note the wide weekly ranges showing heavy stalling action on big weekly volume over the past four weeks. To me, this speaks of distribution around the top, and in my view indicates a reasonable probability that ZM will eventually pan out into a full-blown POD.

 

 

Slack Technologies (WORK) also set up as a beautiful short last week on the double-top move to the $30 price level. As I wrote last week, the idea that the world would flock to their products overlooks the simple fact that it is Microsoft (MSFT) that has the big installed customer just waiting to use Microsoft Teams for their WFH employees.

That theory was correct, and WORK has since plummeted. It gave short-sellers another entry at the 20-dema yesterday before closing below the 50-dma today. Weak rallies from here into the 50-dma would offer lower-risk short-sale entries using the line as a covering guide.

If WORK got as high as the 20-dema, one would quickly be stopped out at the 50-dma but could investigate the possibility of coming back in on the short side higher up at the 20-dema, should such a rally occur. WORK, however, is expected to report earnings tomorrow after the close, so my preference is to wait and see whether any opportunistic rallies occur after earnings.

 

 

Some examples would be Citrix Systems (CTXS), which pushed right into its 50-dma today. It has actually run into resistance around the 50-dma for the past three trading days, so this becomes a simple short-sale set-up. One can short it as close to the 50-dma or the prior highs near 118-120 and then use 120 as a covering guide.

Otherwise, if one is testing it on a move up to the 50-dma from here, the 50-dma would be used as your first covering guide. CTXS is rallying on the premise that everyone will be flocking to their remote conferencing and presentation services, like GoToMeeting® and GoToWebinar®.

The question with any of these WFH theme stocks is just how much new business they will get as a result of COVID-19 and whether the net effect is an increase in customer usage and not a decline. I am skeptical that any new users won’t be offset by declines in meetings and presentations as a result of a general global business slowdown.

 

 

Continuation short-sale entries have shown up in a number of stocks on my watch lists lately, and this is primarily what one has to focus on if one wants to keep playing the short side as the market dives deeper and deeper. DocuSign (DOCU) has, for example, been shortable each time it has run up into its 50-dma this week and may continue to offer short-sale entries on such rallies.

 

 

Something like Activision Blizzard (ATVI) has also been shortable into rallies. This all comes after a prior failed base breakout in late February, so for now rallies up into or just past the 50-dma and 20-dema would offer lower-risk short-sale entries from here.

 

 

About the best thing we can say about a chart like Apple’s (AAPL) is that the rally into the 20-dema last week was a perfect short-sale entry. Since then it has broken lower, and for now is just starting at the underside of its 10-dma where it had the second of two recent short-sale entries.

The first occurred on the rally up to the 20-dema last week, and so far, AAPL shows no inclination to snap out of its funk. As long as it remains weak, the market will remain weak. It does demonstrate that at this stage the short-selling game consists mostly of trying to play continuation entries on the short side of a continuing downtrend.

 

 

Amazon.com (AMZN) is another variation on the continuation short-selling theme. Here we can see that it triggered as a short-sale this morning when it opened just above the 200-dma and then breached the line to trigger a short-sale entry at that point.

This is the type of stuff you are looking for on the short side of this market at this late stage of the game. The trick is in finding stocks that offer entries as close to references for overhead supply as possible. Thus, when AMZN breaches the 200-dma, then the 200-dma serves as a tight covering guide. GOOG’s chart, not shown, is a similar set-up along the 200-dma.

 

 

Netflix (NFLX) held support at its 50-dma yesterday but reversed back below the line today on light volume. It may yet break for its 200-dma, so one could treat this as a short here using the 50-dma as a tight covering guide. Again, my only concern is that the market is deeply oversold currently, and while it can certainly get a lot more oversold, one must handle the short side in nimble and alert fashion.

 

 

Tesla (TSLA) may be setting up as a short here now that it has breached its 50-dma. It spent the past two days running into resistance at the 50-dma, which creates short-sale entries near the line while using it as a tight covering guide. If TSLA is able to regain the 50-dma, however, it could become a moving average undercut & rally (MAU&R) long set-up using the 50-dma as a selling guide.

Obviously, how it acts here along the 50-dma in the coming days will determine whether it is now a valid short-sale target or is simply baiting the shorts before running them through the juicer again. Play it as it lies.

 

 

All of the payment stocks I’ve discussed as short-sale targets in recent reports have continued to move lower. Any rallies into resistance have simply offered continuation short-sale entries.  There’s nothing to do with any of these right now given how extended they are on the downside.

However, all six can populate any short-sale watch list you have in anticipation of any shortable rallies that may ensue. Just another group portrait of the market’s destructive sell-off to marvel at.

 

 

The same thing goes for semiconductor names, which don’t look all that different from the payment stocks, above. Another group chart of stocks that have been swept away by the market’s tidal destruction!

 

 

Twitter (TWTR) gapped up to its 50-dma yesterday, which offered short-sellers a beautiful short-sale entry opportunity when it stalled and closed just below the line on heavy volume. It then peeled away from the 50-dma on the downside today and is now plumbing the lows of its pattern.

Again, an example of what you have to look for if you want to play the short side of the market at this stage of the decline. If somebody wants to gap this thing back up into the 50-dma again, I’ll be happy to look at it more as a possible shortable move rather than a buyable one, that much is certain.

 

 

I wrote over the weekend that if Enphase Energy (ENPH) and SolarEdge (SEDG) breached their 20-demas they would morph into short-sale targets at that point. That occurred on Monday, but only ENPH gave short-sellers a second chance when it rallied back up to the 20-dema on weak volume yesterday. SEDG, not shown, just made a bee-line for its 50-dma, which it then breached today.

ENPH is now at the 50-dma, a breach of which would trigger a new short-sale entry at that point. Otherwise, I’d be watching for weak rallies into the 20-dema as potentially lower-risk short-sale entries from here. Both ENPH and SEDG are just coming off their all-time highs, so are in more vulnerable positions than most formerly leading stocks which have split wide open over the past three weeks.

 

 

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 wrote over the weekend that, “Somehow, I don’t think this soap opera is over yet!” I didn’t realize how prophetic that statement would be, because this week has been loaded with extreme drama worthy of any market-based soap opera. And while the drama is flowing, the environment becomes less target-rich on the short side given the market’s current downside extension.

On the other hand, I’m not so sure I’m ready to test the long side in anticipation of a sharp reaction rally. We saw what looked like a capitulation low on Friday, and that just resulted in a big gap-down on Monday. Yesterday’s big double-reversal with the Dow closing up 1167.14 only led to another brutal down day today with the Dow down -1464.94.

So, it should be obvious to anyone that danger remains high in this market, no matter which side of the market you play simply because volatility is huge and extremely random. So, one has to pay close attention if one is going to play, and the moves are primarily of a day-trading or swing-trading nature, even on the short side.

Therefore, for now, if you don’t fit into either category, cash is king. Meanwhile, at least take the time to savor and reflect upon the history-making market action we are all witnessing in real-time. It is certainly something to behold. Otherwise, this is a very messy market, so if you don’t want to risk having the mess splatter on you, do not play. That is all.

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.