The Gilmo Report

May 10, 2020

May 9, 2020 5:49 pm ET

The markets made history again this week when the fed funds futures moved into negative interest rate territory on Thursday. The market looked to me like it was ready for at least a pullback after Wednesday based on various divergences and the late-day weakness we saw for the second day in a row.

But on Thursday all of this was overridden by what we might now consider QE to Infinity & Beyond as the prospect of negative interest rates sent the algos on a steady buying spree. That spree continued into Friday, despite a brutal jobs number that saw 20.5 million jobs disappear in April.

The NASDAQ Composite Index stumbled its way to higher highs this week, and, believe it or not, is now up for the year. How can this be, you ask? The answer is simple: QE to Infinity & Beyond. And so, the stampede into stocks is perhaps less about fundamental underpinnings and mostly about the extreme mass of liquidity out there looking for a home.



What we’re seeing is something I’ve talked about since late March. Infinite QE creates a bullish wild card that can drive a rally in stocks for no other reason than the fact that it is there. And if one tries to think too logically about what’s going on, one simply gets left behind, because even a nonsensical rally is still a rally!

There is some divergence to be found, however, in the fact that the S&P 500 and Dow Indexes remain well below their 200-day moving averages. They rallied with the NASDAQ this week on very light volume. Overall, the volume levels on both exchanges have been light, and it was notable that many big-stock leaders were trekking higher on Friday on very light volume.



It’s easy to get one’s head severely bent out of shape trying to comprehend all the whys and wherefores of this market rally. The only therapy I can offer is to focus on the set-ups in individual stocks. For the most part, that can keep you in the right place at the right time, even if every market day is a WTF moment.

Precious metals continue to consolidate well, with the Sprott Physical Silver Trust (PSLV) finally clearing its 50-dma on a pocket pivot move Thursday. This puts it in a buyable position using the 50-dma as your selling guide. Obviously, the fed funds futures were the likely catalyst for the move on Thursday, but the bottom line is that QE isn’t going anyway anytime soon.



Meanwhile, the Sprott Physical Gold Trust (PHYS) continues to track tight sideways around its 10-dma and 20-dema. I continue to view the PHYS as buyable on pullbacks toward the 20-dema and the prior mid-April low. That said, one could also buy shares here while using those levels as your selling guide since I consider the backdrop of QE to Infinity & Beyond as a reasonable tailwind for the metals.



As the indexes move higher it is no surprise that the Fantastic Five, Apple (AAPL), (AMZN), Alphabet (GOOG), Facebook (FB) and Microsoft (MSFT) have all continued edging higher. Volume has been very light on the way up, as the stocks have become further extended from lower-risk entry spots.

What is fascinating to note here is that there has been no volume buying in any of these Fantastic Five names all week long! Yet they have kept on melting higher, with no desire to pull back just yet. How long these low-volume rallies can be sustained is a question to ponder, since only pullbacks to support would be the only way new, lower-risk entries could materialize.



Tesla (TSLA) refuses to play out as a Punchbowl of Death (POD) short-sale set-up and instead acts like a Flying V formation, a pattern that is quite common for this QE-infused market environment. Just go through the weekly charts of 20-30 stocks that have had big moves since the March lows, and you will see precisely what I mean.

Meanwhile, TSLA in fact posted its highest closing price since the March lows. As I discussed on Wednesday, one could first treat the stock as buyable along the 10-dma, with the idea of reversing to the short side if it broke below the 10-dma. On Thursday TSLA posted a voodoo volume signature at -39% below average as it held tight at the line.

That presented a lower-risk entry spot, and the stock finally rallied on Friday. The 10-dma remains as near-term support for the stock from here, such that pullbacks to the line could present lower-risk entries. Otherwise, be ready to flip short if the stock busts the 10-dma.



Netflix (NFLX) reversed at its highs on Friday as volume declined sharply. Not a very impressive move considering the huge rally we saw in the NASDAQ 100 that day. In this position we want to watch for pullbacks into the 10-dma on light volume as potentially lower-risk entry opportunities.



Nvidia (NVDA) was another participant in the week’s melt-up parade, posting its highest price levels since the March lows. It is on the verge of breaking out to new highs in a big Flying V formation on the weekly chart. Only pullbacks to the 10-dma would offer lower-risk entries from here.



Normally, NVDA’s deep v-shaped base would be considered faulty, but in this market such patterns can work. One would prefer, however, to buy somewhere in the middle to lower part of the V and thereby capitalize on the sharp upside move up the right side of the V.

If you were paying attention you might have noticed that Alteryx (AYX) did indeed present an actionable set-up after it gapped down on Thursday morning following its Wednesday earnings report. Note that the stock broke all the way down to its 50-dma where it found support and bounced smartly to retake its 200-dma.

A test of the 200-dma on Friday held up and the stock launched to a higher high on strong volume. This is typical of the types of opportunities that can occur after a post-earnings gap-down when the stock comes right into a coherent area of potential support. AYX is now near-term extended.



One could have thrown a dart at a list of cloud names this past week and made money, most likely, because everything in the space was moving.

DocuSign (DOCU) participated nicely on the upside with the reset of the clouds this past week after presenting a voodoo long entry at the 10-dma two Fridays ago.

One last shot could have been had at the 10-dma on Monday morning, and it was off to the races from there. Notice, however, that volume was lacking until it picked up as the stock ran into resistance along the $120 price level on Thursday and Friday. Now we want to watch for any pullback to the 10-dma as a lower-risk entry opportunity. DOCU is expected to report earnings on June 4th.



The same goes for CrowdStrike (CRWD) and ZScaler (ZS) which remain extended on the upside after rallying with the rest of the clouds this past week. Pullbacks to the 10-dma in either would offer lower-risk entries from here. Meanwhile, ZS is expected to report earnings first on May 21st, while CRWD doesn’t report until July.



Slack Technologies (WORK) defied any ideas of shorting the stock into a low-volume rally by moving higher Thursday on strong volume. It was helped along by a strong sales pitch from the company’s CEO on financial cable TV Thursday. It has now broken out, so if you like to buy breakouts, this is the Captain Obvious Special tailored just for you!

Given that it came straight up from the lows of its pattern, however, I might look to be a little more opportunistic on any pullback closer to $30. On balance, breakouts have not led to immediate and substantial upside, so it will be interesting to see how this one plays out. WORK is expected to report earnings on June 8th.



Zoom Telecommunications (ZM) cleared its 10-dma on Thursday on a gap-up move, so it would have been impossible to try and short it at the line where it closed on Wednesday. It has now rallied right up to its prior base breakout point around the $160 price level.

In this position it could post a re-breakout, or it could fail. Thus, one can test it on the short side here, but if it can clear the $160 level and the highs of the past two days it may become a buyable re-breakout. Remember that re-breakouts are not uncommon for this market, so remain open-minded about this possibility.



Low-volume melt-ups were the order of the day this past week, and Citrix Systems (CTXS) is back up near its highs on very dry volume. The stock was up every day this past week, and may even decide to break out, big volume or not. That said, pullbacks to the 10-dma would offer the better, lower-risk entries in my view.



Some old friends of ours in the cloud IPO space are looking interesting here. The first one, CloudFlare (NET) reported earnings on Thursday after the close after a big-volume breakout that day. It then gapped down and filled the gap as it also tested and held the 10-dma/20-dema confluence.

Volume was very high on Friday, creating a supporting pocket pivot off the 10-dma on the gap-fill. The best entry was near the 10-dma on Friday, so if it sees fit to retest the line or at least come in a little closer to it, it could present a lower-risk entry opportunity.



Ping Identity (PING) also reported earnings Wednesday after the close and gapped down just below its 20-dema on Thursday. It quickly regained the 20-dema, so basically pulled off a moving-average undercut & rally (MAU&R) at the line on a shakeout type of move that closed back above the 10-dma. That action also qualifies as a supporting pocket pivot along the 10-dma and 20-dema.

On Friday PING settled back into the 10-dma with volume declining from Thursday’s levels. If it can hold the 10-dma then this puts it in a lower-risk entry position. The other option is to see if you can catch any pullback to and retest of the 20-dema as a more opportunistic entry, if you can get it.



Semiconductors for the most part remain non-descript. If this market rally continues, I would still look for some of these names to come to life. If not, then perhaps some return to the short-side. Some of the big names like ADI and AMAT are rallying into their 200-dmas, while something like LRCX is trying to pull an MAU&R move through its own 200-dma.

I’m mostly focusing on Advanced Micro Devices (AMD) which was leading the pack off the March lows as it then revisited the February highs before pulling back over the past two weeks. Now it’s trying to hang tight along the 20-dema as volume declines. This comes after it undercut and rallied back above the prior 51.41 low in the pattern.

So, one could try and test the stock as a long here at the 20-dema and use the moving average or the 51.41 U&R low as a selling guide.



Intel (INTC) is sitting on the fence here along its 10-dma. Objectively, I have to look at this in 360-degrees, since it now looks like a long here at the 10-dma and 20-dema using those moving averages as selling guides. That said, a reversal back below the lines could trigger it as a short-sale.



Qualcomm (QCOM) is also sitting on the fence, but at its 200-dma. It closed just above the line on Friday with volume up slightly vs. the prior day. If it can hold the 200-dma then it’s a long right here using the line as a selling guide. A reversal back below the 200-dma triggers it as a short-sale. Play it as it lies.



Snap (SNAP) bounced nicely off its 10-dma, where it was buyable Wednesday per my comments in that day’s report. Now it’s making higher highs on light volume, so one has to look for another pullback to the 10-dma as the only potential lower-risk entry opportunity from here.



Sleep Number Corp. (SNBR) finally woke up on Thursday, no doubt with a little prodding from me in my Wednesday report, and cleared the 50-dma. Volume was light, but that didn’t prevent the stock from then clearing the 10-dma as it approaches the April highs. Volume again was very light.

This is another low-volume melt-up, but quite playable if one bought the stock closer to the 20-dema. Now I’d watch for a retest of the 50-dma as a possible lower-risk entry opportunity with the idea of using the 50-dma as a tight selling guide.



Gilead Sciences (GILD) is one of the few stocks that didn’t melt up this past week. Instead, it presented us with a shortable gap-up on news Monday morning and proceeded to move lower all week. It ended the week down near its 50-dma as volume dried up to -61% below average on Friday.

I remain highly skeptical of the true revenue potential of its alleged Covid-19 treatment, Remdesivir. But I won’t let that get in the way of a possible long entry opportunity along the 50-dma if selling remains as dry as it was on Friday. Otherwise, this may remain shortable on rallies up to the 20-dema or as far as the 10-dma.

Near-term, GILD seems played out on the short side, so a bounce might be expected. The other possibility is a clean break below the 50-dma, which would serve as a fresh short-sale trigger if it occurred. Play it as it lies.



Virgin Galactic (SPCE) has followed through with further upside after Wednesday’s pocket pivot. The past two days have seen higher volume vs. the pocket pivot day as the stock stalls a bit around the prior range highs. In any case, pullbacks to the 10-dma would be the only lower-risk entries from here, so I would not chase it here.

In addition, we’re still awaiting the pricing of SPCE’s 150-million share secondary offering. I would prefer to see what happens once that massive slug of stock is dumped into the market. Currently, according to MarketWatch the float is 53.65 million shares while Yahoo! Finance shows it as 67.44 million shares. Meanwhile, MarketSmith shows a float of 178.2 million shares.

Nothing like having consistent data sources. Whatever the float, 150 million new shares represent a substantial amount of new supply. How well this is absorbed will likely tell us a lot about SPCE’s potential from here as the current and only space travel pure-play.



While Beyond Meat’s (BYND) fake-meat products tend to elicit a disgusting sensation on my palate, I love the stock as a long play. It has continued to streak higher following Wednesday’s post-earnings buyable gap-up (BGU) move at the 200-dma. On the weekly chart, we can see that it is now knocking on the door of higher highs as it reaches the top of a Flying V formation.

Since BYND is well beyond the last long entry point closer to the 200-dma on the BGU, I would prefer to let it consolidate for a bit. This would of course form a Flying V with Handle formation, and perhaps if that occurred the 10-dma and 20-dema would have some time to catch up to the stock and provide better references for support at current price levels.



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 week’s rally can only be described as a melt-up that was certainly persistent but lacked volume. Whether that is significant in an environment where the Fed is the primary institutional investor is not clear. When the balance of buying exceeds selling, then the absolute levels are not necessarily that meaningful.

Where we are seeing significant volume is in the wild movements we’re getting in stocks after they report earnings. This past week had several opportunities for alert traders, including AYX, BYND, FTNT, TWLO, and others that were on my Earnings Watch List for the week. More of the same is likely coming this week, and this is where I will focus my attention.

The most puzzling aspect of this market is that it is difficult to tell whether the stock market is in fact functioning as a valid discounting mechanism. If the Fed were not flooding the system with record amounts of QE, we could look to the stock market as a reasonable predictor and discounting mechanism for how this Cov-19 mess is going to finally resolve.

But with the Fed’s massive interference, price discovery seems to be a thing of the past. Thus, it is not clear how much, if any, of the rally is the market discounting a future that perhaps entails a less dire outcome to the corona crisis. You can’t tell what the market is discounting, or even whether it is discounting anything. But one thing is clear: A flood of liquidity from the Fed has done its job of reflating asset prices.

While the economy looking like a U-shaped recovery is perhaps the best possible outcome, the market has already had its own V-shaped, or rather Flying V, recovery. And if one goes through the simple exercise of studying scores of individual stock charts over the past 2-3 years one will find that in fact V-shaped recoveries are a common feature of the market in the Age of QE.

Some pundits are pointing out that the S&P 500 has now reached a 61.8% Fibonacci retracement, which somehow presents a hurdle for the market. This entirely misses the fact that the NASDAQ Composite has now retraced 77.6% of its prior March decline and is now up for the year. Who knows, maybe the market does roll over and die this week, or maybe it just keeps going, Fibonacci levels or not.

Personally, I have never found Fibonacci levels to be all that meaningful because it is always all about the individual stock set-ups. For now, that’s where my head will remain, in a place where it’s least likely to find itself bent out of shape trying to understand a market that appears to be wildly disconnected from the economy. Enough said.

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 positions in PHYS and PSLV, though positions are subject to change at any time and without notice.

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