The Gilmo Report

March 15, 2020

March 14, 2020 5:10 pm ET

Forced selling of epic proportions plagued the market all week long, which has hardly been able to muster any kind of sustainable reaction rally as it has continued to plumb lower lows. Things are so far down at this point that it becomes more useful to look at weekly charts in order to figure out where we are and where we may go from here, at least in the short term.

We did end the week with a big rally, which has some contextual logic to it given the position of the indexes and the way they finished off the week. For example, the NASDAQ Composite Index broke below its June 2019 low at 6190.17 Thursday and rallied to close well above that low in a typical undercut & rally (U&R) move on Friday.

 

 

From the perspective of the S&P 500, the situation is relatively well-defined. It sliced through its own June 2019 low at 2728.81 on Thursday and remains just below, closing Friday at 2711.01. While it has not posted a clear U&R move, it is in a logical position from which to do so this coming week.

 

 

The Dow on the other hand has undercut its December 2019 low at 21,712.53 and rallied to end the week back above that low. So, of the Big Three major market indexes, two posted U&R moves on Friday, and one is on the verge of potentially doing so. The NASDAQ did so at its June 2019 low and the Dow at its December 2018 low. The real test comes this week as we find out whether these have any staying power.

 

 

I would note, however, that the market mostly floundered about all day long on Friday. It wasn’t until President Trump and members of the Centers for Disease Control (CDC) held a press conference at the end of the day reviewing the current COVID-19 situation that the Dow rallied over 1500 points in the last 30 minutes of trade. It was its biggest one-day point rally in market history.

So, the rally was likely a lot of end-of-day short covering ignited by what was seen as a positive press conference and could be short-lived depending on the news flow over the weekend. The situation remains very fluid, but things have become so oversold that a rally of at least a few days would not surprise me. We’ll just have to see how it plays out this coming week.

The urgency of the forced selling throughout the week was evident in the fact that everything was getting sold off in a rush to liquidate. Even in the face of the Fed announcing Thursday that it stood ready to immediately inject $1.5 trillion into the system, the Dow simply turned in its worst daily performance since 1987. The forced selling has gotten to everything, and that includes precious metals.

This is something I’ve warned members could happen in the event of extreme forced selling, and that’s precisely what we’ve seen in this market. If it isn’t nailed down, they’re selling it. And so, as silver breaks below any and all areas of support, the SPDR Gold Shares (GLD) heads for its 200-dma.

On Thursday I blogged to members that the undercut & rally move back through the 147.05 prior low of February 28th might be playable. And in fact, the GLD rallied back up through the 50-dma. As I blogged later on, it was necessary to keep your stop tight, either using the 50-dma as a higher selling guide or the actual 147.05 low. Discipline in this case paid off as the GLD has since moved lower.

An enterprising trader might have even recognized that the tidal wave of forced selling was likely to send the GLD lower, and thus the early rally into the 50-dma on Friday could have also been used as a short-sale entry. I tweeted as much early in the day today, about an hour after the open, and I will sometimes short GLD to hedge my core positions taken in 2000 below $300 an ounce.

Once the GLD started to approach the 200-dma it found some intraday support. However, in this position I would look for the 200-dma to hold as support, with the potential for a U&R back up through the 145.08 low of mid-January. As the GLD comes down, I am still looking to be opportunistic with respect to playing any turn back to the upside.

 

 

Logically, with the Fed pumping $1.5 trillion into the system and likely to lower rates to zero next week when it meets, gold and silver should be rallying. But this is a very instructive example of how forced selling takes everything down in the short-term, and it becomes the overriding logic at play. In the process, opinions or expected linkages to a new wave of QE from the Fed take a back seat to good, old-fashioned sell-stops and basic risk management.

To get a sense of how things may play out if we see the market eventually head lower, it is useful to see how the GLD acted during the last real bear market in October 2008. I’m using a weekly chart of the GLD and a weekly chart of the NASDAQ 100 ETF (QQQ), to illustrate the point where gold broke free of the forced selling during that market period and began to diverge higher.

The brutal market sell-off in October 2008 took gold down with the market, but it bottomed in mid-October. By contrast, we can see that the market, as represented by the QQQ, didn’t bottom until mid-November. But the GLD started a rally that carried up to the prior May highs while the market bounced along and retested its November low before finally turning back to the upside in March 2009.

 

 

 

So, we can see how gold might initially sell off with the market as forced selling takes hold, but may at some point decouple from the market and begin to diverge to the upside. If we’ve seen the market bottom, then I’d look for the 200-dma to serve as support for the GLD as discussed above. However, keep in mind that what happened in 2008 is not a road map for what may happen in 2020, so one should rely on the real-time price action.

Cash remains king for those looking to follow more intermediate-term trends, but for those who are able to handle rapid-fire, opportunistic, and very nimble swing-trading and day-trading expeditions, it is possible to use the volatility to your advantage.  Not that it is easy, but it is possible. As I wrote on Wednesday, one was mostly left to using continuation types of short-sale set-ups as stocks continued to trend lower this week.

Generally, this takes the form of a reflex bounce up to a key area of potential overhead resistance. The basic idea is exemplified by stocks I have discussed in recent reports, so one does not have to go far to find these types of setups.

DocuSign (DOCU) is a perfect example of a short-sale set-up occurring on the same day as a big market gap-up at the open and after it reported earnings yesterday after the close. DOCU gapped up to 80-81 in pre-open trade this morning before rolling over and heading lower from there.

In my last report I noted that one should watch for rallies up into the 50-dma and potential lower-risk short-sale entry opportunities. That approach worked well today. Friday’s open near the 50-dma was good for a roughly 15% move to the downside before DOCU bottomed at 70.02 and turned back to the upside.

From there, if one was playing it on the basis of what was going on with the 620-chart action, it could have then been flipped to the long side. But this is the stuff of swing-traders, and it may turn out that the 50-dma remains as overhead resistance. Perhaps if DOCU could clear the 50-dma, it might then trigger as a long entry at that point. Play it as it lies.

 

 

Slack Technologies (WORK) reported earnings yesterday after the close but gave short-sellers a potential short-sale entry at the 50-dma just above $24 early in the day. That move fell apart into the close as the stock came apart in the last half-hour of trade to close at 21.35.

While playing earnings roulette did not suit my tastes, and I covered before the close, it would have worked quite well as WORK gapped down to 17 or so after earnings came out. But, this morning the CEO of the company came on CNBC and gullible money ran it up over $22 in pre-open trade, giving short-sellers a big gift.

WORK rolled over right at the open and plummeted, eventually bottoming intraday at 15.90. At that point it turned and rallied to close back near the highs at 19.59 and 21 cents below the 19.80 low of January 27th. Watch for a possible U&R through that low as a possible long trigger IF Friday’s oversold market rally has any staying power.

 

 

As the market comes down and down and down and becomes ever more oversold, short-sale targets can morph into Ugly Duckling long plays within the right context. That would be a sharp general market reaction rally off the lows. Therefore, even if you are playing a certain stock on the short side, and perhaps have been doing so for some time over the past 2-3 weeks, be alert to changes that may offer swing-trading long-side opportunities.

Citrix Systems (CTXS) rallied up into its 20-dema early on Friday and offered an optimal short-sale entry right near the open. It then reversed from there before bottoming intraday at 106.38 and then working its way back to the 20-dema to close just above the line.

I tend to view this as a short on moves into the 50-dma, but that all will depend on whether the general market rally holds up. The situation remains fluid, but the next line of resistance for now is the 50-dma.

 

 

Zoom Telecommunications (ZM) keeps rallying into its 10-dma, and each time it has been shortable. Today the stock did it again and reversed to close back at its 20-dema. But while it can’t clear its 10-dma it also isn’t breaking down through the 20-dema.

Volume has continued to decline, so the situation remains unresolved, although one has been able to scalp it on the short side repeatedly over the past four days. That may change, however, and so I would treat this as a 360-degree situation.

Throw out your opinions and just operate on the basis of the technicals. In this position, ZM is a two-side set-up that could resolve in either direction. If it can finally clear the 10-dma, then it may trigger as a long entry at that point. If it decisively busts the 20-dema, then it triggers as a short-sale entry at that point.

And, as usual, all of this will depend on what the general market is doing. The short side has worked so well because the general market has split wide open over the past three weeks. But remain open to any changes that you see in real-time with respect to both the market and individual stock set-ups, even if they are stocks you have played wonderfully on the downside over the past 2-3 weeks.

 

 

Big-stock NASDAQ names have gotten slammed like everything else. I’m watching Apple (AAPL) here as it pulls off an undercut & rally (U&R) move at the prior 256.37 low of February 28th and the 200-dma. In fact, if one were watching the stock closely on Friday, one could have theoretically gone long once it cleared that low.

AAPL then closed at 277.97, so is extended from the U&R low. However, a move through the 10-dma could trigger a long entry at that point. Otherwise, the 10-dma also represents near-term resistance, so failure at the 10-dma triggers it as a short-sale, most likely within the context of the market rolling over as well.

 

 

Netflix (NFLX) is somersaulting around its 200-dma after gapping through the line yesterday on heavy selling volume. But Friday’s action constituted a concrete long entry set-up on a big undercut & rally (U&R) through several January lows in the pattern as well as the 200-dma. Thus, we had both a U&R and a MAU&R on Friday.

The 200-dma serves as near-term support and a selling guide if one had bought the stock on Friday. But from a practical standpoint, we would now look for any lower-volume retest of or pullback closer to the 200-dma as a potentially lower-risk entry.

 

 

Tesla (TSLA) is working as a short-sale target here, as I discussed in my last report. It was shortable right under the 50-dma on Monday and has since moved below the $600 level, making lower lows on Friday on expanded selling volume.

But if the market is able to keep rallying, then watch for a U&R coming up through the 605 low of last Thursday. Otherwise, a weak rally back up into the 50-dma could bring it back into play as a short-sale set-up again.

 

 

Looking for possible Ugly Duckling long set-ups to play IF the general market can post a decent oversold rally from here is a basic exercise everyone should go through this weekend. Look at daily and weekly charts to assess where near-term and not-so-near-term lows exist on the charts. Here are a couple of examples.

The first is ServiceNow (NOW) which posted a U&R through its mid-December 2019 lows on Friday while at the same time clearing its 200-dma on the upside. So, this is a combination U&R and MAU&R at the line. The key here is that while it is extended from the prior December low at 263.58 it is sitting just above the 200-dma.

Therefore, this could be viewed as actionable on the long side here using the 200-dma as a tight selling guide. So, the basic idea is that where you see a U&R from Friday, but the stock is extended to the upside, either look for a retest of the prior low or look for another support reference. In NOW’s case this would be the 200-dma.

 

 

In other cases, you may have a U&R where the stock closed just above the prior reference low. Thus, something like Twitter (TWTR) becomes actionable here after it undercut and then rallied back above the 28.63 low from early November.

TWTR closed Friday at 29.29, so is well within buying range of the U&R low at 28.63. The 28.63 price level would then work as your tight selling guide. Go through your watch lists and see how many of these types of potential Ugly Duckling set-ups you can find and decide if any of them appeal to you as swing trades.

 

 

I have to admit I have a soft spot for Virgin Galactic (SPCE), even though I haven’t been long the thing for many weeks now since it topped outside a quick swing trade off the 50-dma in late February. I grew up as a kid watching the U.S. race to the moon back in the 1960’s and early 1970’s, and I probably built every Apollo spacecraft model that Revell ever put out at the time.

Today, I have a nice stable of museum quality Apollo and other models sitting in display cases at my home, so it remains an area of keen interest for me as a hobby of sorts. Some might call it a fetish, but let’s just say that in my mind, space travel is “cool,” and that’s all there is to it.

SPCE offered a nice investment-oriented outlet for my space-travel interest back in January and February, but it has since burned up on re-entry. However, now it is all the way back to where I first saw it nearly three months ago and is testing its 200-dma as volume dries up.

I see two potential set-ups here that might make it playable IF the general market can throw up at least a short-term rally off of the Thursday lows. The first would be a U&R move through the prior 15.61 low. SPCE attempted that early in the day on Friday but failed.

The second is to try and buy it as close to the 200-dma as possible and then use that as a tight selling guide. There were two opportunities to be had near the 200-dma on Thursday and Friday. So if SPCE is going to act like a reusable spacecraft and go into orbit again, it may be the U&R through 15.60 that becomes the more actionable long set-up, but we’ll see.

 

 

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.

The first thing I would say is that while panic is not an investment strategy, neither is telling people not to panic. And panic in response to the COVID-19 crisis is not appropriate either. It requires a community response, however, so remain cognizant of this. No man (or woman) is an island, as the old saying goes, and COVID-19 is out to prove that point.

Where I live, on the trendy, politically-correct west side of Los Angeles, I marvel at all the “enlightened” people who are hoarding grocery items like toilet paper and canned goods. We’ve even joked on my Twitter page about the opportunity to create a new toilet paper ETF, symbol: POOP. Others like to talk about their emergency supplies of food and other essentials, to which I always ask, “But do you have any guns?”

Their response is usually, “Oh no, we don’t believe in guns!” Well, I tell them, then in a real crisis you had better be ready to share your emergency supplies, because desperate mobs will have no issues of propriety or property rights clouding their thinking. They will simply ransack your house, with you inside it, and you will not remain an island of peace and prosperity within a sea of crisis.

So, while I don’t like to engage in political rants in my reports, keep all this in mind. My point is simply that people should refrain from acting selfish, and to remember that as with any major crisis, it is the community response that makes the difference, not everyone just trying to take care of themselves. It sounds trite to say that “This, too, shall pass,” but it will if we stick together (figuratively, not literally in the new age of social-distancing) and make it pass as a community.

With respect to the market, after the fastest market decline into bear market territory since 1929, everything is an absolute mess. Seriously busted chart patterns litter the technical landscape, and while we may engage in a more significant oversold rally from here, danger remains high. The only set-ups one can go with on the long side are the standard Ugly Duckling set-ups like the U&R and the MAU&R where one can find entries that also allow for very tight risk-management.

Otherwise, those looking for longer-term trends should just stay in cash. My guess is that volatility will remain high, and that means big whipsaw moves in either or both directions, even intraday, may remain the order of the day. That’s certainly what we saw on Thursday, when the Dow rallied 1500 points off its lows before giving it all up and much more in its worst single-day decline since 1987.

That’s also what we saw on Friday, when the Dow suddenly rallied over 1500 points in the last thirty minutes of trade. So, while the charts may show some strong upside moves in a large number of individual stocks on Friday, the fact is that most of these moves did not really come to full fruition until the very end of the day. Most of the day was spent chopping around.

Meanwhile, any sustained oversold market rally may just bring beaten-down formerly leading stocks up into areas of resistance where they become shortable again, and the 200-dmas stand as the first major line of resistance for the Big-Three major market indexes. For short-sellers this means being methodical, persistent, and patient as you wait for stocks to come to you as they rally.

All that said, the wrong type of news flow over the weekend could make everything I’ve discussed in this report completely irrelevant and meaningless by Monday’s open. That’s what happened last weekend, but that is how this market rolls. So, you either roll with it or you stay in cash.

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.