The Gilmo Report

May 19, 2021

May 19, 2021 6:36 pm ET

The short-term, but logical, bounce off the 50-day moving average by the S&P 500 Index set the stage for a short rally that began to stall out on Monday. The index then tried to move higher yesterday before reversing sharply and then gapping lower today in an even sharper price break. By the close, however, it was able to maintain support at the 50-day line on what appears to be higher volume.



The NASDAQ Composite obviously took its own bounce cue from the action of the S&P 500 last Thursday. A similar rally last week stalled on Monday, failed and reversed near the 50-day moving average yesterday, and then gapped down and slashed lower from there today. However, the opening gap-down lows turned out to be the lows for the day as the NASDAQ rallied to close nearly unchanged on roughly even volume.



The Fed meeting minutes did send the market roiling as it swung back and forth throughout the rest of the day. What started to look like a potential reversal to the downside as the market tested the intraday lows with about an hour to go in the trading day suddenly reversed to the upside and ended much more positively than one might have anticipated.

Meanwhile, interest rates rose in response as the 10-Year Treasury Yield ($TNX) attempts to break out of its current descending price channel and consolidation of the prior sharp uptrend into late March, hitting 1.683% today. We can ponder whether a breakout in interest rates might create a bearish backdrop for stocks, and therefore is something to watch for closely.

For today, at least, rising rates put a bid under the declining dollar and led to some selling in precious metals. However, I tend to think that rising interest rates are a sign of rising inflation, and as real interest rates move further into negative territory, this will remain a potential positive catalyst for the precious metals going forward.



What I found interesting over the past few days has been the divergence in precious metals as stocks and Bitcoin were getting sold off. But the Sprott Physical Gold Trust (PHYS) finally ran into some selling today as it churned in a very wide range on heavy volume. For now, the 200-day moving average serves as potentially buyable support on pullbacks from here following what has been a steep, extended run off the March lows.



The Sprott Physical Silver Trust (PSLV) is back up at its prior February highs which in my view serves more as price resistance at this stage of the move up off the March lows. This could also be an area where a more prolonged handle forms in anticipation of a run at the August 2020 highs.

Today the PSLV pulled into the 10-day line on heavy selling volume, which is not what you want to see on such a pullback. Even a slight volume dry-up would have been preferred. I’d be watching the 20-dema for near-term support and also as a more opportunistic entry point if I can get it.



Gold miners and related stocks are quite extended and so today ran into some selling along with the yellow metal.  We want to watch for near-term support to hold at the 200-day line in Agnico Eagle Mines (AEM) and Kirkland Lakes Gold (KL), while Franco-Nevada (FNV) can be watched for support at the 20-dema, although I certainly don’t like the look of today’s outside reversal on heavy volume.

Newmont Corp. (NEM) is most extended from its moving averages and for now the 10-dma serves as a reference for near-term support. It’s currently about 5% above the line, so has some room to pull back. After an extended move off the March highs, a sharp pullback to the line would not surprise me.

Both gold and the gold-related names have been in extended upside moves since the March lows, so it may be that they will all need some time to digest recent gains. That said, watch carefully as these pull back and potentially test near-term support levels as noted above.



Silver miners also look primed to pull back and test near-term support. I would watch for pullbacks into the 10-day line in First Majestic (AG), Coeur Mining (CDE), and Gatos Silver (GATOS) as potentially lower-risk long entry spots. Meanwhile, MAG Silver (MAG) has pulled right into its 10-day moving average on lighter volume, making it the first among these four silver miners to pull into a buyable position at the 10-dma which then becomes your selling guide.



For the most part, I feel like a reporter at the scene of a natural or man-made disaster, sifting through the wreckage for anything salvageable. I have to admit, there isn’t much. Most patterns are busted, and stuff stocks across the board have begun to break down at near-term support. Alcoa (AA), Cleveland-Cliffs (CLF), Freeport-McMoRan (FCX) and U.S. Steel (X) all broke below their 20-demas today, some most starkly than others.

AA triggered as a short at its 20-dema, as did CLF. I’m watching this on rallies to the 20-demas for possible short-sale entries near the line or even potential shakeouts at the moving averages that would then become potentially buyable. FCX closed just below its 20-dema, which technically puts it in a shortable position using the 20-dema as a covering guide.

X is the weakest, gapping all the way down to its 50-dma and staying there all day long. One might take the opportunistic route of looking at this as a potential buy spot using the 50-day line as a selling guide. Overall, the action does not look encouraging among these industrial metals names.



Resource names like uranium producer Cameco (CCJ) and Teck Resources (TECK) also broke near-term support. CCJ is only dipping below its 10-day line so can be watched for possible lower-risk entries near the 20-dema. If it busts the 20-dema, as TECK did today, then it too becomes a short-sale target at that time. TECK already is, so rallies back up into the 20-day line would offer potential short-sale entries from here using the line as a covering guide.



Agricultural commodities, which had been on a tear up until early last week are coming undone as well, as the charts of the Teucrium Corn ETF (CORN), the Teucrium Soybean ETF (SOYB), the Teucrium Wheat ETF (WEAT), and the iPath Coffee ETF (JO) show below. Maybe they’re just setting up to sling-shot higher, so I would continue to monitor these as potential puzzle pieces in the entire agricultural stuff stock group that I follow.



And so agricultural stocks, Agco (AGCO), Corteva (CTCA), and Deere (DE) have split wide open as the chip shortage spreads to agricultural machinery makers and exacerbated selling in the space. Bunge (BG) also dropped just below its 20-dema, so while the other three are clearly extended on the downside, BG is in a shortable position using the 20-day line as a covering guide.



Caterpillar (CAT), as a maker of agricultural, construction, and mining machinery, succumbed as well, but was able to hold support at the 50-day moving average. It also closed just above its prior breakout point and the 20-dema. Thus, one could view this as a possible lower-risk long entry position, but I would have preferred to come in near the 50-day line today instead, which wasn’t necessarily easy to do.



As might be expected, amid the agricultural space carnage, fertilizers were also clobbered. CF Industries (CF), Mosaic (MOS) and Nutrien (NTR) all were knocked below their 10-day moving averages today on gap-down moves. CF didn’t quite make it to its 20-dema, while MOS and NTR are holding near-term support at their own 20-demas. Intrepid Potash (IPO), meanwhile, is best ignored.

I would focus on CF, MOS, and NTR as they test their 20-demas. These could produce lower-risk long entry opportunities. But if the 20-day lines are breached, they would then become short-sale targets at that point using the 20-demas as covering guides. Otherwise, these names are mostly showing a lot of sloppy chart action, as are most stocks in the market currently.



Oils are also getting beat up, although Bonanza Creek Energy (BCEI), which I have discussed as the better one in the group, is holding up at recent highs. It found support at the 10-day line but is still too extended to get long right here, right now. Otherwise, there is nothing that really attracts me to oils currently.



Home builders have also been beaten up this week, and the only thing that any of these look good for at this point would be oversold reflex bounces. Take your pick and throw a dart – maybe you’ll find one to go long, but with interest rising again I do not view this as a positive for the group.



Semiconductors mostly rallied today, but among Applied Materials (AMAT), Advanced Micro Devices (AMD), KLA Corp. (KLAC), Micron Technology (MU), Qorvo (QRVO), and Western Digital (WDC), only AMD looks like it could be buyable after posting a bottom-fishing pocket pivot at its 10-dma today in conjunction with a slow-motion undercut & rally.

Note the big breakout in WDC that immediately blew apart, making the stock perhaps the easiest one to just keep shorting every time it breaks out. The others saw some strong buying off the lows, but for the most part I wouldn’t necessarily want to be chasing strength after one-day reaction rallies unless I can keep risk to a minimum. Perhaps AMD best fits the bill since you have the 10-day line and the prior low at 73.86 as relatively nearby selling guides.



Big-Stock NASDAQ names all rallied off their intraday lows today, of course, coinciding with the NASDAQ 100 Index being the only major market index to close positive. Among Apple (AAPL), (AMZN), Facebook (FB), Alphabet (GOOG), Microsoft (MSFT) and Tesla (TSLA), the only one that looks tempting perhaps is AAPL. However, it would have been preferable to buy it at the 200-day line today, which again would not have been that easy to do given all the wild intraday volatility.

The others look similar in that they have been retesting last week’s lows, so it is possible that a sling-shot type of move in these big-stock NASDAQ stocks could materialize, pushing the NASDAQ back to the upside. That’s something to consider, but overall, these remain in downtrends from the recent highs of anywhere from 2-4 weeks ago.



Cloud names remain so beaten-down that some are trying to turn off their lows. If money is really going to rotate back into this area of the market, then I would simply focus on the biggest of the big-stock clouds. Here we see (CRM) posting a bottom-fishing pocket pivot at its 50-day line which can be treated as buyable using the line as a selling guide. If it reverses and fails at the line, however, it may then become a short-sale target.

The only other one that looks interesting among these four big-stock cloud names is Shopify (SHOP), which has posted two five-day pocket pivots in a row at its 50-day line. Pullbacks closer to the 50-day line from here might offer lower-risk entries with the same proviso as CRM – if it reverses back through the 50-day line, it would then transpose back to a short-sale target, so play them both as they lie.



Today’s action certainly qualifies as being of the WTF variety given the mad intraday swings back and forth, particularly after the Fed meeting minutes were released. This truly gave the market an almost chaotic feel today as it was very difficult to get a firm handle on where things were headed. With just over an hour left in the trading day, the indexes looked like they were on the verge of splitting wide open.

They then found support as the S&P 500 and the Dow were able to hold and bounce off their 50-day moving averages, pushing back toward the unchanged line. Despite the chaos, we remain in no-man’s land, where the next move may be just as capricious, fleeting and chaotic as what we saw today. No doubt, the short side has been a good place to be for most of the week, but things were getting a little piggy by today, so taking some profits and catching one’s breath as we see where this thing goes from here made sense to me.

Frankly, I don’t have any ideas that I consider worth pounding the table on, preferring instead to stick to watching the small group of stocks I monitor intraday, every day for possible actionable set-ups in real-time. This requires patience, the ability to objectively assess a situation in real-time without any prior bullish or bearish bias, and then to act decisively, all while attempting to keep risk as tight as possible.

That, of course, is easier said than done because this market certainly ranks as a particularly messy one. Those of you currently trading it have probably already realized that it’s very easy to make a mess of things if you get on the wrong side of something at the wrong time. That’s because it can take only a matter of minutes for a good trade to suddenly go bad. That’s the soup we are in. Tread nimbly, but tread carefully.

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


Notes on Terminology

Note #1 – Moving Averages: 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 (black line). In all cases I will mostly use the shorthand version of “10-dma,” “50-dma,” etc.

Note #2 – U&R Set-ups: A U&R, or undercut & rally, is a long entry signal that occurs when a stock undercuts (moves below) a prior meaningful low in its chart pattern and rallies back above that low. The precise entry occurs at the prior low, which then becomes your selling guide. There are no other special requirements for a U&R other than the price action. It is similar to Wyckoff’s Spring. A MAU&R, or a moving average undercut & rally, is essentially a shakeout at a moving average where your entry point occurs at the moving average as the stock is coming up through the line. This then becomes your selling guide. You can run things tight by using the actual price levels as stops or allow for 1-3% of further downside (otherwise known as downside porosity) before being stopped out.