The Gilmo Report

March 18, 2020

March 18, 2020 3:21 pm ET

The market’s downtrend has gained more velocity as the action becomes more volatile and furious this week. The indexes gapped to lower lows on Monday, with the Dow posting its worst single-day decline since Black Monday in 1987. It sliced through its December 2018 low on the largest downside point move in its history.

Meanwhile, circuit-breakers have been getting triggered to the point where it’s almost commonplace both in the overnight futures and in the intraday index action. Another interesting factoid is that this is the first time since 1929 that we’ve seen the Dow have three or more 9% daily declines. It’s no longer “getting crazy,” it is crazy, as circuit breakers continued going off today while all of the major market indexes plumbed new lows.

The Dow is now down so far that all of the gains since President Trump took office have evaporated. As perhaps the only President who has fixated on market performance as a barometer of his approval rating, he now finds that he who lives by the sword dies by the sword. Poof!



The NASDAQ Composite Index dropped back below its June 2019 low at 7292.22 on Monday and then briefly attempted to rally back above it yesterday. But the rally was another one-day wonder rally as the index gapped down today and closed another -4.26% in the red and well below the June 2019 low.

At this point an oversold rally that is more than a one-day wonder rally could of course occur at any time, but so far nobody seems interested in buying stocks. At the same time, forced selling appears to have a firm grip on the situation, with no relief so far, but that could change.



How did we get here? The velocity with which this market has split wide open is unprecedented in market history. It all boils down to what I began discussing in my mid- to late-February reports. Essentially, the worst-case scenario, as first outlined in my February 26th report, has emerged. I’ve posted part of those comments on my Twitter page, but I’ll repeat them here in their entirety:

 “The major point to keep in mind here is something I’ve discussed in recent reports.  And that is that the pundits are overlooking something critical about the COVID-19 outbreak. In my view it’s not a matter of whether it’s getting worse or better, or whether government bureaucrats have done a wonderful job of containing the virus (so far, I see no evidence to indicate they have).”

“It’s about the potential for this to act as a catalyst for a popping of the global debt bubble that exists on a sovereign, corporate, and individual level. If the global economy slows down enough to dry things up, then debt that becomes unserviceable begins to default, and a domino effect can ensue that serves as the pin-prick that pops the bubble.”

“So, it’s not about COVID-19 per se, it’s about how it creates conditions for an existing unsustainable underlying condition, namely record global debt on every level, to finally come unraveled.  And that is why I’ve repeatedly stated that I do not trust this market and have not for at least the past couple of weeks.”

And this is what has transpired. It is an unprecedented event in modern times, and my sense is that I may well get to experience a societal condition similar to what my grandparents went through during the Great Depression and what my parents went through during World War II.

It is almost as if nature sensed that the human condition had reached a point of maximum excess, and it was time for the cleansing process to begin, even if it results in the pain of a pandemic.

As the Fed moves to print more dollars, it may be surprising to see that precious metals have not benefited, at least in the short term. That is likely because the dollar is rallying on concerns of a global dollar shortage, believe it or not.

Some $12 trillion in cross-currency funding has created a synthetic dollar short, essentially a shortage of dollars within the global financial system, driving the dollar higher. The U.S. Dollar Index before today was seeing its biggest seven-day rally since Black Wednesday in 1992, as the daily chart of the Invesco DB U.S. Dollar Index Bullish Fund (UUP), shows below.



This in turn likely puts a lid on precious metals near-term, and this may need to run its course before we see precious metals, specifically gold, find their feet. Of course, the only way to play this is to probe on the long side when a concrete long set-up appears and to then keep a tight selling guide.

We can see that on Monday the SPDR Gold Shares (GLD) posted an undercut & rally (U&R) move through the prior 136.19 low, which I blogged about in real-time that morning. It then rallied up to a high of 146.20 yesterday but backed down to close 21 cents below its 200-dma.

In this position the U&R is still in force since the GLD has not yet broken below the prior 136.19 low. The last attempted entry was at the 50-dma last week, but as I blogged at the time, the 50-dma had to be used as your selling guide. Heeding it then put one in a comfortable cash position with which to test out Monday’s U&R at the new 136.19 low.



The WFH (“work from home”) theme seems to be creating its own little FOMO rallies in certain stocks. Mostly this has created a lot of tradeable volatility, and I remain focused on these stocks as two-sided, 360-degree situations depending on how my 620-chart plays out.

Citrix Systems (CTXS) has been all over the place this week as the wide daily ranges on the chart below show. Extreme intraday rallies have set up as short-sale opportunities, but the stock has found a low each time and rallied higher.



The five-minute 620-chart of CTXS shows how the short-sale entry occurred early in the day. It was good for about a 7-10% gain, depending on whether one came in on the MACD “stretch” or waited for a MACD cross to the downside. In either case, the trade would have been profitable by the time the MACD crossed back to the upside and profits could be booked on that basis.



Zoom Telecommunications (ZM) has also been all over the place, and with the market so far down at this point, I might be inclined to treat this as a long under the right conditions. I tend to think that the stock would rally from here in the event of any oversold market rally since it has not been willing to give up the 20-dema or the $100 Century Mark.

Each test of those two areas of support has been successful, and over the past two days ZM has posted two five-day pocket pivots. As long-time members know, I like to see a cluster of five-day pocket pivots in lieu of a single ten-day pocket pivot. Thus, if we get a more substantial oversold rally, look for any pullback to the 10-dma as a lower-risk entry, but be prepared to play it in either direction depending on the precise intraday action.



Shorting stocks at this point might be a bit long in the tooth, but as noted above with CTXS, tactical opportunities can occur on a very short-term basis. Here we see DocuSign (DOCU) rallying right into the 10-dma today, which could put it in a lower-risk short-sale entry using the 10-dma as a tight selling guide.

But watch out for any sharp move through the 10-dma, 20-dema, and 50-dma, which could trigger a long entry with the idea of playing an oversold rally back up near the highs closer to 90. DOCU has been one stock on my daily “play list,” so to speak, like CTXS and ZM, because of the very playable volatility.



My view is that this is a market for nimble swing-traders and day-traders only. Because of the extreme volatility, my approach as such a trader in this environment is to work off a very short list of key stocks in order to better keep track of their intraday movement.

Focusing on too many stocks in this current environment merely complicates matters, since most stocks will trade in synchrony with the market. That means their price movements will likely correlate strongly in any oversold rally, so it’s not at all necessary to focus on too many names.

Apple (AAPL) is another stock on my list, like CTXS, ZM, and DOCU, and it has mostly been shortable on reaction rallies all the way down. It is now sitting below its 200-dma, which could be viewed as shortable resistance using the 200-dma as a tight covering guide. That said, I would certainly be willing to play this as a long if it cleared the 200-dma in a typical moving average undercut & rally (MAU&R) move using the 200-dma as a tight selling guide.

As stocks come down, various permutations of long and short set-ups can present themselves. So by working with a short list of stocks, one can better prepare themselves to be ready for and able to react quickly in the event a long or short set-up triggers in real-time.



Netflix (NFLX) can also be viewed the same way as AAPL. The 200-dma currently serves as shortable resistance, but a move that clears and holds the 200-dma would trigger a MAU&R using the line as a tight selling guide. Note that it is also in undercut & rally land as it flirts with the prior January lows.



Tesla (TSLA) can also be watched here as it closes below the 200-dma for the first time since last October. A move back above the 200-dma would trigger a potential MAU&R long set-up using the 200-dma as a tight selling guide.



I have one Chinese name on my daily working list, (JD), which I’m also prepared to treat in 360-degree fashion. We can see on the daily chart that it was very shortable at the 20-dema/50-dma confluence yesterday, from which it then backed down to move lower this morning on a gap-down open. But from there it rallied back above two prior lows in the pattern, one at 36.35 and the other at 36.81.

JD closed today at 37.70, so can be tested on the long side here using the higher of the two lows at 36.81 as a tight selling guide. If it can then clear what is now the confluence of the 10-dma, 20-dema, and 50-dam, then you may have a clean MAU&R long set-up at that point, and the moving averages would then serve as a new trailing stop/selling guide.



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.

This is an extremely unique environment from my perspective, and likely also from the perspective of anyone else who has had any long-term experience in the markets. The technical damage has been so severe and swift, unlike anything I’ve ever seen, that set-ups in this market are mostly unrecognizable on the charts from even an OWL viewpoint. It’s that bad. So, I simply pick a small handful of big stocks, map out how they might play out, and work ‘em from there.

If one knows where their support and resistance levels are, and keeps their entries tight, then risk can be controlled. Catching falling knives where no nearby references for support can be found is not advisable. Operating in mid-air without a safety net, so to speak, is something I’ll leave to the Famous Flying Wallenda’s.

That’s really all one can do at this point, because there certainly isn’t anything that I consider lower-risk on the short side, and even less that is appealing for its potential to stage a sustained, intermediate-term upside trend on the long side.

If there is a more substantial oversold reaction rally at some point, my guess is that it will be furious. Therefore, one thing you do not want to do is get caught being late to the shorting game, so if you do short stocks rallying into continuation resistance within deep downtrends, make sure you stick to your stops.

Otherwise, I find there is very little that looks optimal right here, right now, and for most investors when there is nothing to do, then you do nothing. The only remotely workable strategy is the one I’ve already discussed. And I’ve shown you the names that I am focused on currently as my vehicles for riding whatever this market decides to do next in what is now the 2020 Bear Market. Take it from there.

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.

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