The Gilmo Report

March 22, 2020

March 20, 2020 8:29 pm ET

The Crash of 2020 persists, as the NASDAQ Composite Index has done little more than form a short bear flag over the past week against a daily backdrop of tremendous intraday volatility. In the meantime, all we have seen so far are brief, oversold rallies, otherwise known as one-day wonder rallies. Some might prefer to use the phrase dead cat bounces (DCBs, for short).



I use the term “crash” because that’s what this is. If we compare 2020 to 1987 and 1929, both considered market crash years, we can see that the extent of the current down leg off the peak (and it may not be over yet) has been -36.02% in 25 trading days off the peak as measured by the Dow. In 1929 the market collapsed -49.4% in 52 days, and in 1987 it collapsed -41.16% in 41 days.

In terms of sheer velocity, however, the Crash of 2020 makes 1987 and 1929 look like child’s play. In 25 days off the peak, the Dow was only down -5.47% in 1987 and only -10.41% in 1929. And if one is foolish enough to think the Crash of 2020 has played itself out, I would strongly urge one to reconsider such an assumption.



The dollar shortage I spoke of in my last report became part of the mainstream media’s news flow as the Wall Street Journal ran an article on Thursday detailing the shortage. The Fed responded on Friday by pledging to supply global central banks with as many dollars as they needed. The dollar, however, as measured by the Invesco DB U.S. Dollar Index Bullish Fund (UUP) doesn’t show much interest in backing down.



The SPDR Gold Shares (GLD) posted a nice rally through the 200-dma following Monday’s undercut & rally (U&R) move through the prior 136.19 low from last November, but that didn’t last long. The U&R turned into the old-style U&R, which I now refer to as an URSA, or “undercut & rally, and short again.” This is more typical of how U&Rs work on the short side.

The GLD broke back below the 200-dma on Wednesday and has been unable to clear near-term resistance at the line over the past two trading days. In this position it looks more like a short than a long, using the 200-dma as a tight covering guide.



I blogged on Thursday that a major dislocation was going on with gold and silver with respect to physical metal vs. paper metal. Both the GLD and the iShares Silver Trust (SLV) represent paper gold, and they are selling off with the futures, which also represent paper gold and silver. Gold futures ended the week just under $1490 an ounce while silver futures ended the week at $12.49 an ounce.

Meanwhile the physical market is an entirely different story. If you try and buy gold or silver bullion from a reputable dealer, there is no inventory to be had. Like your local grocery store, they are sold out! Among the dealers I checked one-ounce gold American Eagle coins were going for over $1600 a piece, while one-ounce silver American Eagles were going for as much as $21 or more.

It’s difficult to say whether this dislocation in physical vs. paper precious metals prices, where the differential in physical silver is nearly 100% over the futures price, will correct itself. It’s possible that paper gold and silver are subject to systemic or counter-party risk, and for this reason the GLD and SLV become dangerous to hold as anything more than trading vehicles.

I’m willing to let this play out before jumping to any solid conclusions. Logically, one might expect paper prices to catch up to physical prices, but it is quite possible, in this current environment, that something more systemic is afoot here. For me to get more constructive on the GLD, I need to see it clear the 200-dma again, pronto.

As far as individual stocks go, the song remains the same. Only nimble swing-traders and day-traders should even think about trading in this environment, while anyone else is advised to stay in cash.

Citrix Systems (CTXS) continued to swing in wide ranges over the final two days of the trading week, posting failed breakouts on three of the last four trading days. All four days presented rallies one could have easily shorted into. Thursday’s rally failed near where Wednesday’s did at the $140 price level while Friday’s rally failed at the new-high breakout point around $130.

CTXS ended the week right at the confluence of its 10-dma, 20-dema, and 50-dma following a failed breakout. This implies that a breach of the three moving averages would confirm the stock as a late-stage failed-base (LSFB) short-sale set-up. That can be watched for as a short-sale entry trigger, otherwise I would continue to stalk rallies from here as potential short-sale entries.



Zoom Telecommunications (ZM) posted an all-time closing high on Friday but has been churning on heavy volume over the past two trading days as it has lurched into new-high price ground. I continue to view this as suspect, and I would watch this for potential short-sale entries up here above $130.

That said, ZM is also extended from the long side of the equation as it sits well above its 10-dma, the highest moving average in the pattern currently. If the market breaks lower this week, then look for ZM to potentially fail as well.



DocuSign (DOCU) has rallied into its 50-dma, where it stalled on heavy options-expiration volume on Friday. This puts the stock in a potentially optimal short-sale entry position using the 50-dma or Friday’s high at 82.06 as a covering guide.



Slack Technologies (WORK), another alleged beneficiary of the new WFH movement, has rallied right up into its 20-dema and 50-dma, where it stalled on Friday. Despite quadruple-witching options expiration, the stock stalled on decreasing volume. This puts it in a lower-risk short-sale entry position using the 50-dma or 20-dema as covering guides, depending on how tight one wants to keep risk.



Here’s (JD) rallying right up into its 20-dema on Friday where it became shortable at that point. It then backed down and reversed to close near the lows of the day. This remains shortable on rallies up to the 20-dema or 50-dma from here.



I wrote last weekend that for the most part short-sellers are left to catching continuation short-sale entries within existing downtrends in formerly leading, but now busted, stocks. Rallies into the end of the week helped to create lower-risk entries in a number of stocks on my short watch lists. Below is a group chart of several stocks that ran into and reversed at resistance on Friday.

This includes big-stocks like (AMZN) and Chinese online retailer Alibaba (BABA), among others. You can study the chart for yourself, but I would note that among these ZScaler (ZS) remains in a very shortable position right here underneath the 50-dma while using the line as a tight covering guide.



So, these are all some names you can add to your own short list of short-sale candidates. I have about 20-30 names I go through every night and then I pick 5-10 among these to focus on the next day. You can make use of my list as shown in this report or use your own.

Apple (AAPL) is a good example of another continuation short-sale entry at the 200-dma on Friday. The stock opened just under the line and briefly rallied above it before reversing to close at lower lows on heavy options-expiration volume. It was a short at the line on Friday and is now extended on the downside.



Netflix (NFLX) also served itself up as a short on Friday when it reversed at the 20-dema and from a point near the 50-dma. I continue to view this as a short on rallies up into both moving averages while using either as a covering guide depending on how tight one wishes to manage their risk.



Tesla (TSLA) surprisingly posted a bottom-fishing pocket pivot on Thursday at the 200-dma. That was good for a one-day wonder rally as the stock then ran out of gas on Friday. I’m not so sure I want to be long this thing, especially since they have now closed their only U.S. manufacturing plant due to the pandemic.

The reality of zero car deliveries could be fatal for the company, at least with respect to the stock price. However, TSLA had already topped some time ago as it has plummeted over 50% from its early-February peak. A breach of the 200-dma would trigger TSLA as a short-sale at that point.



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 rallies in individual stocks leading into Friday’s quadruple-witching options expiration brought new life to short-sellers looking for optimal continuation short-sale entries. Rallies in many stocks that populate my current short watch lists offered optimal short-sale entries on Thursday and Friday, as this report shows.

My approach to this market remains the same. I will continue to look to short rallies as continuation short-sale entries within persistent downtrends. Despite how far the market is down off the peak currently, I don’t see why it can’t eventually move lower, maybe sooner than later given the record downside velocity we’ve seen so far.

The debt and liquidity crisis that has emerged in the wake of a global economy that has come to a screeching halt has certainly not abated. This is all despite the Fed throwing everything but the kitchen sink at the problem. Thus, we are witnessing in real-time the death of QE as bonds of all stripes sell-off in a mad dash for the exits.

Witness below the group chart of four popular bond ETFs, the iShares IBOXX High-Yield Corporate Bond ETF (HYG), the iShares IBOXX Investment Grade Corporate Bond ETF (LQD), the iShares National Muni Bond ETF (MUB), and the iShares 20+ Year Treasury Bond ETF (TLT). The first three have been decimated, while the TLT is holding up a little better but remains in a clearly-defined downtrend channel.



This is the market telling the Fed to take a hike as it brutally ignores the Fed’s money-printing advances. However, the foundational logic of QE, essentially the idea that the Fed can create wealth out of thin air, was always flawed. It was just a matter of the right catalyst coming along to expose the Emperor’s new QE clothes. COVID-19 is that catalyst. Stay safe everyone.

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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