The Gilmo Report

March 29, 2020

March 28, 2020 8:07 pm ET

Technically, the indexes are still holding up in an oversold rally, but intraday volatility remains high. In my view, the fat part of the shorting game that began in late February has come and gone. We are therefore left in an environment where nimble swing traders and day traders are left trying to play the volatility if they can.

As the daily chart of the NASDAQ Composite Index illustrates, all of the Big Three major market indexes that includes the S&P 500 and the Dow ran into resistance at their 20-demas on Thursday. They then gapped back to the downside on Friday and closed down on lighter volume across the board. Technically, the indexes remain in a four- to five-day rally attempt off the Monday lows, depending on whether you want to call Monday’s action a rally day off the lows.

 

 

The bounce this week was logical from a long-term perspective as the Dow and the S&P both bounced off a similar two-year consolidation that formed between early 2015 and late 2017. That period was marked by a wide-ranging price environment with well-defined highs and lows, leading to zero net progress between early 2015 and the latter part of 2017, as the weekly chart below shows.

 

 

The pundits are out in force currently, with many saying we’ve put in a bottom, while others insist that we must retest the lows before an all-clear signal can be issued. Still others believe things are bad enough and likely to get worse so that a move to new lows is likely. My own view is to simply let the market tell its own story.

In the meantime, I have no intention of altering my approach. Longer-term trend-following investors should remain in cash, period. At the same time, I believe my approach of selecting and following a limited list of stocks as swing-trading and/or day-trading vehicles is appropriate for anyone still seeking to trade the extreme volatility that has become this market’s trademark.

Now that the SPDR Gold Shares (GLD) has regained its 200-dma, which it did on Monday on a moving average undercut & rally (MAU&R) long entry signal, I am looking for paper metals to track more closely with physical metals. The GLD gapped closer to its prior March highs on Tuesday and has spent the past three days consolidating tightly as volume dried up sharply on Friday.

This can be treated as a secondary entry here using the 50-dma as a selling guide. However, if we can get it, a constructive pullback closer to the 50-dma would offer an even more optimal entry from here.

 

 

The iShares Silver Trust (SLV) has even more ground to cover if it is to regain some semblance of parity with its physical counterpart. My own check of physical metals dealers shows silver rounds, basically coin-shaped pieces of pure silver, priced at anywhere from $17 to $22 each, depending on what dealers you check. American Silver Eagles can be found for “as low as” $21.26 each, but one must buy a minimum of 1,500 coins.

Remember what I discussed on Wednesday. The SLV is currently trading above the 13.11 low of September 2018, putting it in a U&R long entry position using the 13.11 low as a selling guide. The 13.55 low of May 2019 sits eleven cents above Friday’s closing price of 13.44. So far, the SLV is holding tight up here as volume dries up sharply, similar to the GLD.

 

 

Some members have asked me to discuss the physical gold and silver markets and to provide guidance on buying it, but there is nothing magical about it. You go onto the internet and look around at all the physical dealers’ websites and determine where you can purchase what you are looking for. I have no specific advice to offer in this regard, since there is nothing sophisticated about my approach.

Over the past 20 years, I have simply looked to buy physical metals when nobody loves them, and they are abundantly available from physical dealers. I have never read a book on the topic, and so have none to offer as recommendations, and I have never made a distinction between “old” coins, “new” coins, or gold bars. My suggestion is to pull out the elbow grease and do some research on the internet, but the reality is that if you want physical metals now, you’re going to pay up for them, end of story.

In the spirit of my current approach to the market, I will continue to stick with the handful of names that populate my daily focus list. This list can vary slightly on a day-to-day basis, but for the most part I find that these stocks work well enough as long or short vehicles depending on how they are acting in real-time. You can of course always see fit to create your own list, while applying the same basic trading methods.

Citrix Systems (CTXS) picked up a buy recommendation at $138 price target from Goldman Sachs on Friday, pushing it back above the $140 price level. This coincides with the prior high, making for a very narrow, v-shaped, double-top formation. Volume was strong all week as it posted five up days in a row after holding support at the confluence of its 10-dma, 20-dema, and 50-dma on Monday.

On Thursday, CTXS held a re-breakout attempt and then moved higher on Friday on the Goldman recommendation, despite a very weak general market. Since I’m not going to chase this long up here, it makes more sense to stalk a potential double-top reversal off the highs. Depending on how this opens up on Monday, we can observe the action on the five-minute 620-chart and decide as to whether this is a worthwhile short at that time.

 

 

Zoom Telecommunications (ZM) also received an analyst recommendation on Friday from Goldman, but this was a sell rating based on valuation while raising the price target from $70 to $80. Somebody must have thought the analyst said $180, because ZM rallied on this news.

Notice, however, that on Thursday the stock had pulled into the lows of a short flag formation as volume dried up, putting in a voodoo long entry position of sorts. The stock is certainly not in a buy position here, since only a pullback to the 10-dma would offer a lower-risk entry from here.

That said, there is talk of more competitors entering the fray as tele-video services become a hot item. Even RingCentral (RNG) is coming up with its own product that will replace ZM’s product within RNG’s own customer base. Developments like this could impinge on ZM’s market, and with a sky-high valuation it could eventually fail on this latest move to new highs.

For now, I’m just laying back and watching to see how this develops going forward. ZM tends to move around quite a bit, so the volatility makes it a prime trading vehicle from my perspective. Ultimately, if it were going to fail, we would have to see a breach of the rising 10-dma as the first sign of this.

 

 

With RingCentral (RNG) looking to enter the tele-video fray, it posted a big-volume pocket pivot off its 50-dma on Friday. This is a strong move, but the stock is extended as it stalls near the prior February highs. However, I think this is a name to watch as a small, constructive pullback from here could bring it into very buyable range if the general market rally holds up, so add it to your list.

 

 

You’ve probably noticed that much of my focus is on cloud names, and there’s a good reason for that. While they all show huge PE expansions, which is one potential theme that can act as a short catalyst, the potential for COVID-19 to drive a massive shift toward the cloud also serves as a potential theme and catalyst for the long side.

In this manner, CTXS and ZM are clear 360-degree situations. The same can be said for DocuSign (DOCU). Here we see the stock coming in after forming a little double-top that was shortable earlier in the week, but Friday’s action constituted support at confluence of the 20-dema and 50-dma.

Thus, the 360-degree concept applies since this puts DOCU in a lower-risk long entry position using the two moving averages as a tight selling guide. Otherwise, a breach of moving averages within the context of a market break back toward its prior lows could trigger it as a short-sale.

 

 

Slack Technologies (WORK) is what we might call an impossible v-shaped formation because the reality is that the stock has doubled off the lows of last week. In two weeks, it has gone from a low of 15.10 to a peak of 29.97 on Thursday. I was able to scalp it on the short side Wednesday and covered into the close as I tend to not want to hold much overnight in this environment.

It then gapped up on Thursday, but there was no let-up from buyers early in the day, so the only logical thing to do was to flip long. On Friday, it traded down at the open, but again found support along the intraday lows, so again I decided to go long. It ended the day at 28.58 on above-average volume, so if the market rally continues into next week, I would not be surprised to see WORK break out.

The pattern, at least from an orthodox, traditionalist viewpoint, doesn’t seem to have much chance of pulling off a breakout. But remember, this is 2020, and a mass of QE, unlike anything we’ve seen, even during the entirety of the Age of QE since 2009, is out there ready to defy the odds and would-be short-sellers.

 

 

CrowdStrike (CRWD) looks like it could be a more textbook short at the 50-dma, at least it did on Wednesday, but it has since regained the 50-dma and held the line on Friday even as the general market sold off. Volume declined to below average, so technically I have to view this as a lower-risk long entry position using the 50-dma as a tight selling guide.

Obviously, if it breaches the 50-dma then it would trigger as a short-sale target at that point. So far, however, CRWD seems to be benefiting from this theme of COVID-19 driving everyone into the cloud as the new trend of social-distancing potentially becomes an enduring new reality of human interaction.

 

 

ZScaler (ZS) looks a bit less constructive than the other clouds discussed above, primarily because it closed back below its 200-dma on Friday on above-average volume. This puts it in a lower-risk short-sale entry position using the 200-dma as a tight selling guide.

ZS is, however, another cloud name, so I treat this as a 360-degree situation. If it can regain the 200-dma, then we would have a quick shakeout through the line and an MAU&R long set-up using the 200-dma as a tight selling guide.

 

 

JD.com (JD) worked well as a double-top short-sale entry on Wednesday and again on Thursday. It closed in the red on Friday as it ran right into its 50-dma at 40.15 and pinned itself there at the bell. Volume dried up sharply on Friday, so technically this acts as a lower-risk entry right here using the 50-dma as your selling guide.

Otherwise, a breach of the 50-dma triggers this as a short-sale entry at that point. 360-degrees, please. Chinese names in general remain weak and trendless, and the same can certainly be said about JD or its larger brethren, Alibaba (BABA).

 

 

Big-stock NASDAQ names remain in a somewhat confused state. Apple (AAPL) closed back below its 200-dma on Friday as volume came in at just average. Technically this puts the stock in a shortable position using the 200-dma as a covering guide.

 

 

Amazon.com (AMZN) can’t get past its 50-dma and therefore remains a short at the line. The 50-dma then becomes your covering guide. Volume did dry up on Friday as it held the lower 20-dema, so if it can clear the 50-dma it may then be treated as a long entry using the 50-dma as a tight selling guide.

 

 

Netflix (NFLX) is not unlike AMZN but is performing more of a pirouette around its own 50-dma. It reversed off the intraday highs on Friday but closed just above its 50-dma as selling volume increased vs. the prior day. While it can be treated as buyable here just above the 50-dma while using the line as a tight selling guide, another breach of the 50-dma could trigger it as a short-sale at that point.

As with all of these big-stock NASDAQ names, market context will no doubt be a factor. Thus, as a group, any one of them can become a short-sale target under the right circumstances, namely a general market retest of the prior lows.

 

 

Tesla (TSLA) has to get some credit for holding up and rallying after last week’s bottom-fishing pocket pivot off the 200-dma. It ran into logical resistance along the 20-dema on Wednesday and Thursday and has since backed down slightly.

Volume has dried up sharply in the process, which could make this a long target if the general market rally picks up this coming week. Otherwise, weak rallies back up into the 20-dema can be watched for as possible short-sale entry points.

 

 

I find it useful to monitor a basket of big-stock NASDAQ names as a way of trying to determine movements in the two 3x-leveraged NASDAQ 100 Index ETFs. That would be, of course, the ProShares UltraPro QQQ (TQQQ) on the long side, and the ProShares UltraShort QQQ (SQQQ) on the short side. Given the extreme intraday index volatility, it is possible to short-term trade these using the five-minute 620-chart, which I’ll discuss in this weekend’s video report.

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.

After a brutal March we’ve reached what may turn out to be a massive chop zone. We may continue to chop and flop around here as the market builds what may eventually become a bear flag in anticipation of a second leg down in a longer-term bear market, sooner or later. That’s one possibility.

The other possibility is a bear market rally that sees the NASDAQ Composite, for example, rally as high as its 200-dma. That would constitute about a 50% retracement of the March collapse off the peak. I am highly skeptical of a new bull market starting, for obvious reasons, but that doesn’t mean we can’t see the market bifurcate and create some interesting thematic opportunities.

A bifurcated scenario would be an environment where stocks that might benefit from the COVID-19 crisis, such as clouds, perform well while those that are directly in the crosshairs of the crisis, such as Walt Disney (DIS), cruise line operators, airlines, and the like continue to languish. That’s another possibility, but in my view, it would not be an investable one as much as a tradeable one.

There is an immense amount of liquidity now in the system, and who knows where it might spark a brush fire. The dollar is now dropping like a rock, which in my view has to be positive for gold and silver, and possibly even certain stocks. Selling volume has been heavy in the Invesco DB US Dollar Bullish Fund (UUP), and the UUP looks set to break below its 50-dma.

 

 

The main point I would make is that there are a lot of wild cards in this market, not the least of which is massive liquidity being injected into the system, which in turn can have unintended, even extremely unexpected consequences, including hyper-inflation and the general death of QE. If we were in uncharted territory before the coronavirus, the situation is even more extreme today.

And that is why one must be on their toes if they intend to trade this market. Conditions are such that disaster may lurk just around the corner for the long side as much as for the short side. So, if your toes aren’t up to the task, cash remains king.

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 a position in SLV, though positions are subject to change at any time and without notice.

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