The Gilmo Report

May 13, 2020

May 13, 2020 3:30 pm ET

I find that the process of only taking initial long entries on bona fide OWL set-ups and shunning breakouts usually puts me in the position of running out of things to buy as a market rally gets extended. As the environment goes from an initial target-rich state to a target-scarce state, that naturally causes one to back off on the long side. At that point you can just let the breakout buyers keep running things up for you.

The usual pattern we see in QE market rallies off a prior correction low is that initially the highest-velocity upside price moves occur right off the lows, or at least mid-way up on the route back toward the pre-correction highs. After a while, the upside velocity slows down a bit and we start to see stocks approach and even break out past their prior pre-correction highs. For me, this is the point at which I exercise maximum caution on the long side.

In my last report I really only had a couple of long ideas that I felt were in optimal entry positions: Advanced Micro Devices (AMD) and Ping Identity Holdings (PING). This was perhaps telling, as the lack of fresh long targets might have been a clue that a market pullback was coming. Nevertheless, both had nice swing-trading moves to the upside on Monday and then came crashing down with the market yesterday and today.

Advanced Micro Devices (AMD) was sitting at its 20-dema over the weekend and looked quite buyable. As it turned out, it was, but the move was just a one-day wonder. It morphed into a short this morning on the breach of the 20-dema. I would play this as a short right here using the 20-dema as a covering guide.

One possibility to keep in mind is that it may open up tomorrow back above the line, and if it does then it would initially be a moving-average undercut & rally type of situation. However, I might prefer to watch for a reversal back below the 20-dema if in fact it did open above the line tomorrow, using that as a short-sale trigger.

 

 

Ping Identity Holdings (PING) pulled into its 20-dema on Monday and then launched about 12% higher from there on a breakout move. Of course, we’re not dumb enough to chase it on the breakout, and as I tweeted mid-day on Monday, I myself was looking at this as a swing-trade move to sell into.

Sure enough, during after-hours on Monday, PING announced an 8.5 million share secondary offering, sending the stock back to the downside as the breakout failed quickly. The stock then broke below the 20-dema today, so initially looks like a Punchbowl of Death (POD) type of short-sale set-up using the 10-dma or 20-dema as covering guides.

 

 

The weekly chart shows a stock that broke more than 50% off its peak in March in 3-4 weeks and then shot back to those highs over the next eight weeks. That’s a typical punchbowl formation, and the first indication of a possible POD short-sale set-up is the breach of the 20-dema, so play it as it lies.

 

 

All of this added up to a market rally that found itself suddenly overcome with a case of fatigue, selling off yesterday on news that certain areas of the country, such as New York City, Los Angeles, and the San Francisco Bay Area would remain under stay-at-home orders. The sell-off then continued today, but so far, all we know for sure is that we now have only two days down off the peak.

The NASDAQ Composite Index reversed off its highs yesterday on higher volume, and then continued lower before finding support today at its 20-dema. Volume was slightly lighter vs. yesterday but still above average. For now, I’d watch the 20-dema as near-term support which, if breached, might bring the 50-dma into play.

 

 

The S&P 500 broke below its own 20-dema and is now dangling above the 50-dma. It never made it as far as the 200-dma as the leadership lately has been centered within the NASDAQ 100 and other NASDAQ tech names. Volume was light yesterday, and lighter again today. So far, the S&P’s pullback looks somewhat more benign than the NASDAQ’s, but the situation remains fluid.

 

 

Precious metals held up very well as stocks sold off today. The Sprott Physical Gold Trust (PHYS) posted a pocket pivot at its 10-dma on very strong volume. This remains buyable here using the 10-dma/20-dema confluence as your selling guide.

 

 

The Sprott Physical Silver Trust (PSLV) also remains in a buyable position as it sits along the highs of a one-month price range extending back to mid-April. It is also back above its 10-dma and 20-dema, such that any small pullback into the two moving averages would offer a more opportunistic entry. This despite the PSLV being buyable here using the 50-dma at 5.51 as your selling guide.

 

 

If the market is going to roll lower from here, the question then becomes how to play it on the short side. Obviously, if you were playing the names I’ve been discussing in recent reports in 360-degree style, then you may have caught some short entries over the past two trading days. Now, I’m stalking potential failure-type patterns where rallies begin to roll back through their 10-dma and 20-demas.

One group to watch in this regard is the Fantastic Five, Apple (AAPL), Amazon.com (AMZN), Alphabet (GOOG), Facebook (FB) and Microsoft (MSFT). Note that FB, GOOG, and MSFT all broke below their 10-dmas, and now support at the 20-dema has to be watched closely. If they can hold, then they could very well become buyable at their 20-demas which would then serve as your selling guides.

AAPL and AMZN are holding up relatively better, and the pullbacks to the 10-dmas can initially be viewed as lower-risk long entry spots. We can also see that AMZN held support near its 20-dema. How these all act from here will no doubt have a strong influence on where the market goes from here, so watch these carefully as they start to test near-term support at their 10-dmas and 20-demas.

 

 

If they all busted their 20-demas decisively, the easier way to play a breakdown in these big-stock NASDAQ 100 techs would be to simply go long the ProShares UltraPro Short QQQ ETF (SQQQ) as a vehicle for any potential move lower.

We can also look to Tesla (TSLA) as a possible Punchbowl of Death (POD) short-sale set-up, looking for the proper triggers and entry points. The stock showed some mettle today as it held a pullback near the 20-dema with volume picking up, which has the look of supporting action at the line.

Therefore, given that it closed back above the 10-dma, one could first take the long side here and use the 10-dma as a tight selling guide. A clean breach of the 20-dema, however, would trigger this as a short-sale with the idea that this could play out as a POD short-sale set-up. Play it as it lies.

 

 

It’s fairly easy to see that after a two-day sell-off from the peak, many stocks are now sitting on the fence at near-term support. The possibilities therefore are still of a 360-degree nature. Netflix (NFLX) is stalling around its highs but at the same time found support at its 10-dma today on higher volume.

That looks somewhat constructive, and certainly more like a lower-risk long entry. A breach of the 10-dma and 20-dema, of course would trigger this as a short-sale at that point. NFLX is another 360-degree play that can be played long or short based on the real-time evidence going forward. Initially, however, this is setting up as a long using the 10-dma as a tight selling guide.

 

 

Nvidia (NVDA) is another variation on the same exact theme. Here it sits on the fence after pulling into its 10-dma and finding support off the line on much higher volume vs. yesterday. If it can hold, it is a long entry here using the 10-dma as a tight selling guide, but a breach of the 10-dma and 20-dema would…well, by now, you get the idea. NVDA is expected to report earnings on May 21st.

All of these names remain 360-degree plays, but after two days of a sell-off we should be open to the possibility that the pullbacks just set up lower-risk entries at near-term support. Meanwhile, we monitor them for any downside breaks that will likely provide some solid clues about where this market is headed from here.

 

 

The $32 level has replaced the $30 level as a reference for resistance in Slack Technologies (WORK). After breaking out last week, this week the stock has done nothing but bump its head along the $32 price level. It is now on the verge of failing on this most recent breakout as it found support along the 10-dma today on higher volume.

So here we have another variation on the same theme again. The pullback to the 10-dma showing some supporting action presents a possible lower-risk long entry using the 10-dma as a tight selling guide. Bust the 10-dma, and WORK becomes a potential failed-base type of short-sale set-up using the 10-dma as a covering guide, should that occur.

You’ll notice that I’m not taking a bullish or bearish view on any of the stocks I’ve discussed in this report. All I know is that I’ve got two days down off the peak, and things could get worse, or the pullback could be short-lived. But it’s quite a simple matter to figure out what to do with these based on the evidence right here, right now and have a plan to deal with them based on the character of any new evidence.

WORK is expected to report earnings on June 8th.

 

 

Zoom Telecommunications (ZM) is hovering along its recent breakout point, from which it initially failed back in late April. This means, therefore, that the stock is re-breaking out, and could potentially move higher from here. If we figure the breakout point is 164.94, then we can use this price level as a reference for playing the stock long or short.

If it can hold here and remain above 164.94, then it can be maintained as a long entry on the re-breakout. Otherwise, a break below 164.94 could trigger it as another breakout failure type of short-sale entry. ZM is a great stock to trade in both directions given its strong short-term trends, so keep your mind wide open on this one and play it as it lies.

 

 

Citrix Systems (CTXS) has pulled into its 20-dema where it held support today on light volume. Notice how Monday’s low-volume breakout attempt didn’t hold, but this pullback presents a lower-risk entry using today’s low or the 20-dema as your selling guides, depending on your risk-preference.

Of course, a decisive breach of the 20-dema could trigger this as a late-stage type of short-sale set-up. So far, in this report, we’ve got a nice handful of stocks to watch here as 360-degree plays where the set-ups could present long entries initially. But possible short-sale entries may also materialize if the action begins to deteriorate and near-term support is broken.

 

 

You could also watch Alteryx (AYX) to see if it can hold support here along the 200-dma and also the 20-dema. In fact, it bounced right off the 20-dema today on higher volume and closed above the 10-dma. So, I suppose one could then play it as a long using the 10-dma as a tight selling guide.

Notice how the strong-volume strength last Friday when AYX broke out of its April-May price range went nowhere. That’s typical for this market, but an opportunistic approach might make this a reasonable long here along the 10-dma, 20-dema, and 200-dma.

 

 

You can also add DocuSign (DOCU), CrowdStrike (CRWD) and ZScaler (ZS), favorite clouds of mine since late March, to your list of names to watch. All of these remain above their 10-dmas and can be watched for pullbacks to the line as possible lower-risk entries. If they start to bust near-term support, however, the situation changes.

Note that ZS is expected to report earnings first next week on May 21st, DOCU is expected to report earnings on June 4th and CRWD is expected to report on July.

 

 

CloudFlare (NET) is holding last Thursday’s breakout, but the spot to buy it was at the 10-dma last Friday right after the breakout. The stock reversed near Thursday’s highs yesterday and then moved lower again today. It’s holding above the 10-dma nicely, however, and I would watch for pullbacks to the line as possible lower-risk entries from here.

And, in typical 360-degree fashion, a breach of the 10-dma and 20-dema could also trigger this as a possible base-failure type of short-sale set-up.

 

 

I think if I’m going to play semiconductors in either direction, Intel (INTC) is perhaps a bit too dull for my taste. I can stick to other semiconductors, like Qualcomm (QCOM). Note how it morphed into a short at the 200-dma yesterday when it reversed to the downside. Volume was light and didn’t pick up until today when the stock found support at the 20-dema.

In this position I’m inclined to look at QCOM as a long using the 20-dema as my selling guide. Another weak rally into the 200-dma could bring it back into play as a short, or a clean breach of the 20-dema could bring it into play as a fresh short-sale entry if that occurred. As with other names I’ve discussed so far in this report, the possibilities are of a distinct 360-degree nature, so you have to play them as they lie.

 

 

When it comes to opportunistic long entries, I favor pullbacks to the 20-dema rather than the 10-dma. That’s because a deeper pullback usually sets the stock up better for a rebound. So here we see Snap (SNAP) coming right into its 20-dema, where it held support on slightly higher, but still light, volume.

You can probably figure this out for yourself as a long entry here using the 20-dema as a tight selling guide. A breach of the 20-dema that has consequences for the short side can be watched for as a possible short-sale entry if that occurs.

 

 

Here comes Sleep Number Corp. (SNBR) heading back down toward its 20-dema and 50-dma on light volume. So far this looks orderly, as do many of these pullbacks into support that we’ve looked at so far. Thus, SNBR may become buyable as it approaches the two moving averages and can be watched for opportunistic long entries near the lines.

 

 

Gilead Sciences (GILD) popped higher on Monday as I thought it would based on the prior low-volume pullback toward the 50-dma on Friday.  That rally lasted one day before it rolled back below the 10-dma, triggering again as a short-sale entry. The stock continued lower today but is now meeting up with its 50-dma as volume dried up to -51.5% below average.

Perhaps this sets up another possible move up and off the 50-dma, and therefore a lower-risk long entry possibility. That said, a breach of the line would trigger this as a short-sale at that point. We’ll see whether GILD has any gas left in the tank for a bounce off the line or not.

 

 

Virgin Galactic (SPCE) has traded right down to its 50-dma on light volume which makes it look like it is buyable here using the line as a tight selling guide. However, there remains the issue of a pending 150 million share secondary offering as well as a 25 million share block of stock that Virgin Group, SPCE’s parent, is looking to sell in a proposed at-the-market offering.

Virgin Group’s airline business needs cash, and SPCE stock looks to be the most readily available source. As far as I know, neither the secondary offering nor Virgin Group’s block of stock has been priced. Until they are completed, I prefer to hang loose and wait to see how the stock acts once all this new supply is unleashed.

 

 

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.

While the current situation remains uncertain, it is still quite concrete in terms of what we’re looking for in the individual set-ups. As seen in this report, a great many names are pulling into near-term support where they may very well offer lower-risk long entry opportunities. That said, we must also be alert to breaches of near-term support, which could offer clues that this two-day market pullback has further to go.

It may even have a lot further to go, or maybe it turns and rockets higher courtesy of massive amounts of QE in the system currently. But we don’t have to occupy ourselves with speculating over that, we can simply go with the set-ups we see, while avoiding any bearish or bullish bias. Just play them as they lie, in 360-degree fashion, and let the set-ups lead you in the right direction.

While I have had two fantastic days on the short side of that market, I am fully prepared to accept that this is all I will get on the downside, at least for now. In the meantime, I am open to whatever the market wants to show me at this juncture where I see so many stocks pulling into near-term support. So, take your cue accordingly.

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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