The Gilmo Report

March 25, 2020

March 25, 2020 3:36 pm ET

The market remains within the confines of a bear trend but is currently attempting its first real oversold rally since beginning its record-breaking crash in late February. I blogged Monday afternoon that I was starting to see some evidence of a potential reaction move off the lows, but I still didn’t view this as anything more than a bear market rally. So far, the real-time evidence favors this assessment.

The NASDAQ Composite Index got closer to its 20-dema today than the other Big Three major market indexes, but all three acted the same way as they reversed to closed in the lower part of their daily price ranges on higher volume. With the Fed going all-in earlier in the week and the government going all-in today with a $2 trillion relief spending bill, the largest spending bill of any kind in the nation’s history, investors saw fit to sell the news.

 

 

The formula here remains simple. For anyone but the nimblest of swing-traders and day-traders, cash is king. Otherwise, patience and a willingness to wait in the tall grass for the easy, pretty setups can be rewarding for short-sellers, and that certainly was the case today.

Paper gold and silver finally started to play catch-up to the physical metals as the SPDR Gold Shares (GLD) immediately retook its 200-dma on Monday morning. As I wrote over the weekend, “For me to get more constructive on the GLD, I need to see it clear the 200-dma again, pronto.” It seemed as if the GLD was listening when it gapped above its 200-dma on Monday, setting up a moving average undercut & rally long entry at that point using the 200-dma as a tight selling guide.

With the metal back up near its prior early-March highs, a constructive pullback to the 50-dma would offer a secondary long entry opportunity. Meanwhile, premiums in precious metals remain high, with one-ounce gold coins almost impossible to find and in most cases priced well above $1800 an ounce.

 

 

Silver’s physical premium remains as high as 80% above the current futures price, with some dealers offering American Silver Eagles for a whopping $24 each! There are many theories for the huge dislocation between physical and paper metals, ranging from the shut-down of production by many gold producers in response to COVID-19 to some entity attempting to corner the physical market in anticipation of a run on the futures.

The weekly of the iShares Silver Trust (SLV) is where we can find possible references for a U&R entry and selling guide given the sharp move off the lows this week. The SLV closed today at 13.51, which puts it just above the 13.11 low of September 2018, so one could go long on that basis using 13.11 as a selling guide.

The 13.55 low of May 2019, last year, lies four cents above. If the SLV can regain that low, then that would help tighten things up by offering a higher guide for an absolute or trailing stop.

 

 

When it comes to individual stocks, we’ve seen a large number of v-shaped rallies off the lows of last week. These rallies began last week, hence the reason for my blog post on Monday that I could see the potential for some sort of reaction rally to occur. It is the action of individual stocks that will first clue you in to any potential turn off the lows, even if only short term.

The numerous v-shaped rallies we’ve seen in stocks are typically persistent as they push right past moving averages and keeping moving higher as they defy short-sellers trying to come in on top of them on the way up. But this is not unusual, since I’ve written about this in both How to Make Money Selling Stocks Short, the book I co-authored with Bill O’Neil in 2004, and Short-Selling with the O’Neil Disciples, the book I wrote solo in 2014.

In both of those short-selling books I pointed out that shortable reaction rallies can often carry a stock 3-5%, sometimes even more past a key moving average. Thus, one has to be persistent while keeping risk under tight control. More recently, I’ve adopted the use of the five-minute 620 chart to better guide entries into rallies and to control risk very tightly.

Citrix Systems (CTXS) is an example of a less cooperative name today that looked like it might fail at the confluence of its 10-dma, 20-dema, and 50-dma on Monday, but held up by the close on strong volume. It again tested its prior failed breakout point today, getting as high as 131.11 in the last hour of trade.

A typical pattern that I’ve seen on oversold reaction rally days has been an opening gap-up followed by a drift back to the downside, and then a move back to highs. This is a pattern that is evident in individual stocks and the general market indexes, and that’s what we saw this morning as the market looked like it was reversing hard right off the bat.

But as I’ve discussed many times before, in this type of situation your initial short-selling window occurs within the first 1-2 hours or so of the trading day. So, you see here that CTXS flashed a bearish MACD cross to the downside which allowed for a quick short scalp before the MACD stretched to the downside and then crossed bullishly, triggering an intraday cover point.

For the rest of the day CTXS held above its 6-period and 20-period exponential moving averages on the five-minute 620-chart before cutting loose in the last ten minutes of the trading day. This is also a typical pattern. You get the early short scalp within the first 1-2 hours after the open, and then often you’ll see a break late in the day IF the general market rally also starts to falter.

 

 

This is what we saw today, and it worked in almost textbook fashion. Now, in this position, CTXS remains shortable using the high of today at 131.11 as a covering guide. Otherwise, the new-high breakout point, which in my book is anything but a proper buy point, at 130.55 can also be used, with rallies up closer to that level offering the more optimal short-sale entries.

 

 

Zoom Telecommunications (ZM) went near-term climactic on Monday and then gapped off the peak on Tuesday as it gave back all of Monday’s gains and a pinch more just for good measure. That was followed by a small gap-up move this morning and another run for the highs before stalling on above-average volume.

In this position ZM is a 360-degree situation. I like it as a short on moves toward the highs, such as it had today, with the idea of trying to time a short entry using the 620-chart. Otherwise, watch for any breach of the 10-dma at 124.18 as a possible late-stage breakout failure set-up going forward.

 

 

DocuSign (DOCU) is one of those v-shaped “WTF” rallies, as I like to call them, that just keeps pushing higher. This leaves would-be short-sellers salivating at the move scratching their heads and muttering to themselves, “WTF???” But notice that DOCU’s rally only carried it about 5% past the 50-dma.

It finally cracked today on the 620-chart and broke down to the 50-dma on light volume as buyers disappeared. In this position, bounces off the 50-dma can be watched on the 620-chart for possible short entries. Otherwise, a clean breach of the 50-dma acts as a second trigger for a short-sale entry at that point, using the 50-dma as a tight covering guide.

 

 

Slack Technologies (WORK) is another almost identical v-shaped WTF rally which illustrates another fact of life on the short side of this market when stocks go much further past a key moving average. That is that when the moving averages no longer function as resistance and the stock moves well above them, we then look for prior price highs as potential price resistance.

So, as WORK pushed past its 50-dma two days ago, I was stopped out to be sure. However, as it approached the $28 price level yesterday it was possible to test short-sale entries using the 620-chart. Yesterday’s entry worked only marginally, while today’s worked much better with the stock pushing into the red by the close.

In this position I would watch for any further rallies up into or closer to the $28 level as potentially optimal short-sale entry opportunities. Barring that, a breach of the 50-dma would trigger a second short-sale entry at that point using the 50-dma as a covering guide as with DOCU.

 

 

Of course, there are still the textbook examples like CrowdStrike (CRWD) which reversed at its 50-dma today on weak volume. This triggers the stock as a short-sale right here, using the high of today at 59.50 or the 50-dma at 56.65 as your covering guides. I would prefer using the 50-dma since it provides for much tighter risk control.

 

 

Hopefully you’re getting an idea of how these v-shaped WTF rallies can be treated on the short side. Just because something doesn’t stop at a moving average doesn’t mean we stop looking for short-sale entries because we have several ways to approach this. I’ve discussed the concept of using the traditional short-sale set-up known as the venerable double-top, which is also how DOCU and WORK have played out to some degree.

ZScaler (ZS) is another double-top type of set-up since it rallied a little over 10% past its 200-dma yesterday and today. It actually moved to a higher high this morning as it cleared the 66.50 high of February 20th. So, in this case, I looked to short this around this prior high based on the double-top set-up and timed my entry on the 620-chart.

This is the typical type of set-up to look for in a stock that has rallied well past a key moving average. Note also that resistance along a prior high or highs creates a double-top look in many cases, so that price resistance coincides with a double-top set-up.

 

 

JD.com (JD) has rallied about 5% or so past its 50-dma, stalling above the $42.50 price level on lighter volume. Notice that the area around the 42.50 level is something of an axis point as well as a minor double-top formation.

So, in this position, I would look to short JD close to that axis point around 42.50, using my 620-chart as a way to control risk if the trade doesn’t work out. Otherwise, a clean breach of the 50-dma would trigger a secondary short-sale entry point if it occurs, while using the 50-dma as a tight covering guide.

 

 

In big-stock NASDAQ land, Amazon.com (AMZN) reversed at its 50-dma today in textbook fashion. The rally into the 50-dma this morning offered a lower-risk short-sale entry, and one can watch for any future moves up into the line as potential short-sale entries from here.

 

 

Apple (AAPL) became a textbook short today when it reversed at the 200-dma on heavy selling volume. That puts it right in short-sale range here, about 2% below the 200-dma while using the moving average as a very tight covering guide.

 

 

In this report I’m essentially discussing the handful of stocks that are my primary focus/action list on a daily basis, and which I have focused on in recent reports as a way of providing some continuity with respect to the way I’m approaching this current market. I treat these all as 360-degree situations, willing to go long or short on a day-trading or swing-trading basis.  However, you can see how today’s action presented a very strong argument for a market reversal back to the downside as virtually all of these names rolled over.

Netflix (NFLX) has been on this list, and today it triggered as a short-sale entry when it opened up slightly and then reversed back through the 50-dma on a buyer’s boycott. The stock is now extended on the downside but can be watched for moves back up into the 20-dema or even the 50-dma as potentially lower-risk short-sale entries from here.

 

 

Tesla (TSLA) has been able to continue rallying following last Wednesday’s bottom-fishing pocket pivot at the 200-dma on that day. It has now rallied into and stalled at the 20-dema, which brings it into a short-sale entry position at the 20-dema while using the line as a tight covering 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.

Going through my watch lists this afternoon I can see so many stocks stalling and reversing at resistance today in textbook fashion. Some ticket symbols to look at in this regard are: AMAT, AMD, AVGO, AVLR, COUP, CRM, DDOG, DECK, ENPH, FIVN, INTC, LITE, LRCX, LULU, MSFT, MU, NOW, NTES, NVDA, OKTA, RNG, SHOP, SPLK, WDAY, WDC, and ZEN. And that’s just from one of my watch lists! I also discussed several of these names as short-sale candidates to watch today in last night’s video report.

Typically, the action of individual stocks is our first clue as to the future direction of the market. Right here, right now, this action argues for a possible retest of the lows. Obviously, its not 100% guaranteed, but you have to wonder when all these stocks are stalling and reversing in textbook fashion even as the Fed and the U.S. government go all-in. Perhaps they realize the absurdity of a country already $23 trillion in debt coming in so matter-of-factly with another $2 trillion in “relief” spending.

It’s a mad, mad, mad world, and getting MADDA (Make America Deeper in Debt Again!) all the time. Creating new bubbles as a way of fixing old but now popped bubbles strikes me as something fraught with unintended consequences, if not outright absurd, and we may soon see what those unintended consequences are as the 2020 Market Crash continues to play out. Stay safe.

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.