The Gilmo Report

May 17, 2020

May 16, 2020 3:06 pm ET

The major indexes did a little bit of the zombie walk this past week, posting higher highs on Monday before selling off hard on Tuesday and Wednesday. The final two days of the week were spent stumbling back to the upside as the NASDAQ Composite Index found support along its 20-dema. Volume was higher on an options expiration day, but below-average levels seen in the Tuesday and Wednesday sell-offs.

 

 

The S&P 500 posted an undercut & rally move Thursday after undercutting the early-May low. That took the index up into the 10-dma on Friday on stronger options expiration volume. The S&P has also had two prior two-day sell-offs in what has mostly been a big chop zone over the past month. Some might want to say that the three two-day sell-offs in the pattern form the right sides of a left shoulder, head, and right shoulder.

 

 

I don’t pay that much attention to such patterns on index charts, but on occasion they can turn out to be a precursor to at least a deeper pullback. Meanwhile, many are comparing the current market environment to late 2008 and early 2009, when the 2007-2009 Financial Crisis Bear Market bottomed.

Frankly, I’m not so sure such comparisons are valid. The bear market of 2007-2009 began in late-October 2007 and then had a quick first leg down. It chopped around for two months before rolling over again in late December on the second leg down. That took it down approximately -25% off the October 2007 peak by the time it undercut the January 2008 low and rallied in mid-March 2008.

That led to a bear market rally that took the NASDAQ up into its 200-dma, where it chopped around until late summer 2008 when it split wide open. That was the third and final leg of the 2007-2009 bear market. If I had to decide, I would say that the current rally may be more like the rally off the March 2008 low.

My point is simply that we may be in a longer-term correction, maybe even a bear market, given that we’ve just had one leg down so far. Maybe this is just an odd one-leg-down bear market, but I don’t think one can assume that. And I’m not so sure that direct comparisons to the bottom in late 2008 are not perhaps a bit premature.

 

 

We’ll get a good sense of just how marketable U.S. Treasury debt is over the next 3-4 weeks when the Treasury does something that it has never done before. That would be issuing nearly $1 trillion in Treasury debt. Are there willing buyers, or does the Fed become the buyer of last resort? This presents an interesting wild card that will be played, the consequences of which may be unintended.

More debt and more money-printing to go with it just solidify the bullish case for precious metals. The Sprott Physical Gold Trust (PHYS) on Friday matched its highest close since early February of 2013 and looks to me like it is revving up to break out. Pullbacks to the 10-dma are buyable, in my view, but it can also be bought here using the 10-dma/20-dema confluence as a selling guide.

 

 

The big mover lately has been silver. The Sprott Physical Silver Trust (PSLV) has been tracking tight sideways for more than a month and finally popped to higher highs on Friday. The move came on a big-volume gap-up, which could be treated as a buyable gap-up (BGU) using the intraday low at 5.96 as a selling guide for the portion of your position purchased up at these prices.

 

 

The gold-to-silver ratio has been at record levels for some time now, but the white metal is starting to show some spunk here in an effort to play catch-up to its yellow-metal cousin. There has been an argument to be made since late March as silver lagged that eventually it would show more upside acceleration as it caught up to gold. Friday’s action certainly provided evidence of this possibility.

The Fantastic Five, Apple (AAPL), Amazon.com (AMZN), Alphabet (GOOG), Facebook (FB) and Microsoft (MSFT), all tested their 10-dmas and 20-demas this past week and held support. On Friday, we saw all five of these find some volume support off these near-term moving averages on higher options expiration volume.

Objectively, all five can be considered to be in lower-risk long entry positions using their 10-dmas or 20-demas as selling guides. Notice also that AMZN has posted three five-day pocket pivots in a row along its 10-dma, while MSFT posted a pocket pivot at its 10-dma on Friday. As long as they all hold their 10-dma/20-dema support levels, they’re fine.

 

 

The Fantastic Five remains an important group of stocks for the market. Not only do they comprise a 21.1% weighting in the S&P 500, but also an astounding 45.6% weighting in the NASDAQ 100. You can almost bank on the concept that where these stocks go from here will have a large influence on where the market goes from here.

Tesla (TSLA) can be said to be in a Punchbowl formation, but until it busts the 20-dema it is not a Punchbowl of Death (POD) short-sale set-up. It continues to defy any thought of this as it held tight at its 10-dma on Friday with volume drying up to voodoo levels at -43% below average. This puts it in a long entry position using the 10-dma as a tight selling guide.

 

 

Netflix (NFLX) posted a pocket pivot at its 10-dma on Thursday and then pushed to higher highs on Friday as volume receded. Not what I would call your strong breakout, but the stock was buyable along the 10-dma per my comments in Wednesday’s report. That remains the case for now on further pullbacks to the line from here.

 

 

Nvidia (NVDA) posted a big-volume breakout on Friday, but as I noted in my Wednesday report, it was best bought at the 10-dma on the preceding pullback. Otherwise, I wouldn’t want to be chasing this breakout ahead of earnings which are expected next Thursday, May 21st.

 

 

Semiconductors were hit at the end of the week after the Trump Administration again moved to curtail chip supplies from Huawei. Some fared better than others.

Advanced Micro Devices (AMD) is hanging along its 10-dma and 20-dema here as volume declines. The stock regained the 50-dma on a moving average undercut & rally (MAU&R) move on Thursday, which was one possibility that I discussed in my Wednesday report. This keeps it in a buyable position using the 10-dma as a tight selling guide.

 

 

Qualcomm (QCOM) was one of the unlucky ones. It had rallied into its 200-dma on Thursday, which brought it into a lower-risk short-sale entry position at the line. That would have worked well if one had shorted it on Thursday and held overnight as the stock gapped down back below its 20-dema.

It’s now dangling below its 20-dema in no-man’s land as we await its next set-up. This is typical for most semiconductor names as the group has lagged since the March lows.

 

 

Ping Identity Holdings (PING) priced its 8.5 million share secondary offering on Thursday at $24. This has sent the stock back below its 20-dema, which initially looks like a short-sale entry spot given the look of the weekly chart, which I posted and discussed in Wednesday’s report. One thing to watch for, however, would be a move back above the 20-dema which could trigger it as a MAU&R type of set-up on the long side.

Otherwise, a test of the 50-dma is always a possibility. If 8.5 million shares are a bit too much supply in the short-term, it could even breach the line. So this has to be played in 360-degree fashion, but first as a short here just below the 20-dema while using the line as a tight covering guide.

 

 

Most cloud names that I have discussed since March have continue to trek higher, but almost all are currently not in buyable range. Therefore, it remains a matter of waiting for pullbacks as lower-risk entries while their up trends remain intact. However, if for some reason the market decides to roll lower in a retest of the March lows, it is possible that some of these cloud names could offer interesting short-sale targets as the leaders of the prior uptrend.

As I pointed out in my Wednesday report, you don’t want to chase the breakout in Slack Technologies (WORK). The trick here, as I noted, was to look at buying it on pullbacks to the 10-dma, which was possible Thursday morning. It then moved to higher highs on Friday before reversing to close negative.

Note that it was unable to hold the move above $32, which has presented something of a zone of resistance for the stock following the breakout. I would only look to buy this at the 10-dma, and if it breached the 10-dma, it could easily morph into a short-sale target as a failed-base type of set-up. So consider all aspects of the stock as its expected June 8th earnings report date approaches.

 

 

Zoom Telecommunications (ZM) posted an all-time closing high on Friday, but volume was severely lacking. The re-breakout so far is holding up, but as it approaches the prior highs around $160, I’d be on the lookout for a possible double-top situation to arise, as it has twice before since mid-March.

 

 

Citrix Systems (CTXS) is pretty much in the same position it was on Wednesday as it hangs along the 20-dema. One can still treat this as a buyable pullback using the 20-dema as a selling guide, but the flip side here is that the 10-dma still serves as overhead resistance. Thus, it remains unresolved, but my tendency here is to short it using the 10-dma as a tight covering guide in the event it attempts a re-breakout.

 

 

Alteryx (AYX) was buyable on the pullback to the 20-dema on Thursday, and it has since launched back to the weekly highs on increased, but lighter, volume. From here, it is only buyable on pullbacks to the 20-dema, in my view, using the line as a tight selling guide.

 

 

ZScaler (ZS), not shown, has been tracking higher along its 10-dma, but the stock goes on my Earnings Watch List for now as it is expected to report this coming Thursday, May 21st. Notably, ZS did post a pocket pivot at its 10-dma on Thursday.

DocuSign (DOCU) and CrowdStrike (CRWD) don’t look all that much different from ZS as they remain in shallow uptrends along their 10-dmas. CRWD again stalled along the $80 price level on Friday while DOCU continued marching further into new-high price territory. Pullbacks either to the 10-dma could offer lower-risk entry opportunities, but at this stage I would tend to prefer the most opportunistic route of looking for pullbacks to the 20-demas, if I can get ‘em.

 

 

Snap (SNAP) is still hanging along its 20-dema which, you guessed it, keeps it in a lower-risk long entry position using the line as a tight selling guide.

 

 

Sleep Number Corp. (SNBR) became quite buyable on Thursday as it pulled right into the 50-dma. I wrote on Wednesday that, “SNBR may become buyable as it approaches the two moving averages and can be watched for opportunistic long entries near the lines.” So, if one was watching for a pullback on Thursday, it was served up that morning.

SNBR wedged itself on Friday right between its 10-dma and 20-dema as volume dried up to -54.9% below average. If one missed the pullback to the 50-dma, one could try taking a position here but use the 20-dema as a tight selling guide given that the stock closed 8.3% above the 50-dma on Friday.

 

 

Gilead Sciences (GILD) is perhaps one of the most volatile, messy charts you’ll look at in this market, but notice the nice orderly drift lower on light volume over the past two weeks. It finally skidded just below the 50-dma on Friday as volume remained low. Apparently, buyers have lost interest in all the Remdesivir hype.

In this position, the stock is technically a short using the 50-dma as a tight covering guide. I tend to take a more opportunistic approach in that I’d prefer to short a rally up to the confluence of the 10-dma and 20-dema if I’m going to short the stock at all.

 

 

You might notice that most stocks discussed in this report haven’t made much in the way of net upside progress over the past week. That’s consistent with the general market action as the indexes made higher highs on Monday and then chopped around for the next four days. One stock that finally had a fire lit under its rear portal, however, was Alpha Pro Tech (APT).

I’ve kept discussing it in my reports as it has tracked tight sideways along its 50-dma with volume drying up sharply, keeping it in a buyable position. Once I decided to stop talking about it, APT got going on Thursday with a big-volume pocket pivot. That took the stock up 24.81% in one day, which in my book is good enough for a “bag it and tag it” trade.

APT then pulled back on Friday but remains well above its moving averages. It is still 8.8% above its 10-dma, which would be your only reference for a buyable pullback point from here. As of the last reported date, the stock still has about 4 million shares sold short on a 9.7 million share float.

 

 

Both GILD and APT are members of my Covid-19 Group Watch List which I discussed in detail during last weekend’s video report. Novavax (NVAX) was one name featured in last weekend’s GVR and it had a huge move, including a buyable gap-up (BGU) after earnings on Tuesday this past week. I will review the group again in this weekend’s GVR.

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.

I wrote on Wednesday that with so many stocks coming down into references for near-term support such as their 10-day simple or 20-day exponential moving averages, a case could be made for stocks to hold the line and at least attempt a rebound. That’s what we saw on Thursday and Friday as the indexes shrugged off early sell-offs each day.

This is the third time the market has rebounded after sharp two-day sell-offs since mid-April. Each time the major market indexes then moved higher. The question then becomes whether the Rule of Three comes into play here and the third sharp two-day sell-off does not lead to higher highs. Either way, we remain in something of a chop zone where chasing strength is not advisable – pick your spots carefully and maintain a 360-degree orientation.

I anticipate that the Fed will have to ramp up its balance sheet once again, and likely sooner than later. In the process we may get to see just when the Fed finds itself pushing on a string and the absurdity embedded in the concept that more debt and more money-printing somehow creates real wealth finally comes to bear. Stay alert.

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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